Richardcyoung.com

The Online Home of Author and Investor, Dick Young

  • Home
  • How We Are Different
  • About Us
    • Foundation Principles
    • Contributors
  • Investing
    • You’ve Read The Last Issue of Intelligence Report, Now What?
  • Your Survival Guy
  • The Great Reset
  • COVID-19
  • My Rifles
  • Dividends and Compounding
  • Your Security
  • The Swiss Way
  • Dick Young
  • Debbie Young
  • Key West
  • Paris
  • Dick’s R&B Top 100
  • Liberty & Freedom Map
  • Your Health
  • Ron Paul
  • Bank Credit & Money
  • Dick Young’s Safe America
  • Your Survival Guy’s Super States
  • Critical Race Theory
  • NNT & Cholesterol
  • Work to Make Money/Invest to Save Money

Dangerous Rules Make American Pensions Riskier

August 2, 2016 By E.J. Smith - Your Survival Guy

The abuse of expected returns assumptions at public pension funds in America is something I have regularly raised a red flag about. Take a look here at The Economist’s comparison of American public pension fund rules with those for private funds and foreign public funds. The opportunity to use inflated future return expectations leads public pensions in America to make less than realistic assumptions about future liabilities, thereby threatening the system itself by making risk more attractive than it should be.

Private-sector pension funds in America and elsewhere (and Canadian public funds) regard a pension promise as a kind of debt. So they use corporate-bond yields to discount future liabilities. As bond yields have fallen, so the cost of paying pensions has risen sharply. At the end of 2007, American corporate pension funds had a small surplus; by the end of last year, they had a $404 billion deficit.

American public pension funds are allowed (under rules from the Government Accounting Standards Board) to discount their liabilities by the expected return on their assets. The higher the expected return, the higher the discount rate. That means, in turn, that liabilities are lower and the amount of money which the employer has to put aside today is smaller.

Investing in riskier assets is thus an attractive option for a public-sector employer, which can tap only two sources of funding. It can ask its workers to contribute more, but since they are well-unionised that can lead to friction (after all, higher pension contributions amount to a pay cut). Or the employer can take the money from the public purse—either by cutting other services or by raising taxes. Neither option is politically popular.

Unsurprisingly, therefore, the academics found that American public pension funds choose a riskier approach. Theory suggests that as pension funds mature (ie, more of their members are retired), they should allocate their portfolios more conservatively, because the promised benefits need to be met sooner and funds cannot risk a sudden decline in the value of their assets. That is the case with private-sector pension funds, but public funds take more risk as they mature—putting more money into equities, alternative assets (like private equity) and junk bonds.

Public pension plans have also increased their allocation to risky asset classes as interest rates and bond yields have declined. Again, this does not make sense in theory. The expected return on both risk-free and risky assets should decline in tandem. But a fall in ten-year Treasury-bond yields of five percentage points has been associated with a 15-point increase in public funds’ allocation to risky assets.

How the Sausage is Made: Here two leaders from CalPERS (America’s largest public pension fund) explain how they generate their return assumptions.

Related Posts

  • Buy American, Hire American
  • American Job Creators
  • Pensions Headed for Trouble
  • Author
  • Recent Posts
E.J. Smith - Your Survival Guy
E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998.

E.J. has trained at Sig Sauer Academy in Epping, NH, NH, where he completed course-work in Practical and Defensive Handgun, Conceal Carry Pistol, Shotguns, Precision Scope Rifle and Kidnapping Prevention.

E.J. plays a Yamaha Recording Custom drum set with Zilldjian cymbals. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris.

Please get in touch with E.J. at ejsmith@yoursurvivalguy.com
Latest posts by E.J. Smith - Your Survival Guy (see all)
  • BUY THE DIPS? Can You Catch a Ginsu Knife? - May 19, 2022
  • PRIMARIES: Trump Endorsed Candidates’ HUGE Night - May 18, 2022
  • BE VIGILANT: The Rats Are Scurrying in These Rough Markets - May 17, 2022

Dick Young’s Must Reads

  • How Can You Maximize Natural Immunity to Viruses?
  • What’s the Best Survival Currency?
  • “I’ve Got Guys Buying Guns/Ammo for Me All Through the Night.”
  • What a Way to Make a Living: New Hampshire #1
  • California’s Progressive Liberals Have Created a Monster
  • A Cashless Society Is A Debacle for Americans
  • You’ve Read The Last Issue of Intelligence Report, Now What?
  • The Four Most Important Words in Investing
  • Your Odds with Statins: 500 to 1?
  • Conflict Between Democratic Sovereignty and Transnational Progressivism (Globalism)

Disclosure

RSS Youngresearch.com

  • BUY THE DIPS? Can You Catch a Ginsu Knife?
  • MARKET TURNING: Canada’s Housing Market Turmoil
  • “I’ve Been with Richard Young for 30 Years”
  • All-Powerful Money Managers Voting YOUR Money Targeted by Senate GOP
  • HORDING CASH: Funds Hold the Highest Level of Cash Since 9/11
  • COMMODITY CRUNCH: Will Tesla Buy a Cobalt Mine?
  • Young Americans Fall in Love with Farming, Again
  • Your Survival Guy: “Sell in May, Buy After Labor Day?”
  • China’s Economy Taking Hit from Zero-COVID Strategy
  • Is Your Financial Advisor Hiding the Truth About ESG?

What Would We Do without the Experts?

V4 Stands Against North African and Middle Eastern Invasion

BUY THE DIPS? Can You Catch a Ginsu Knife?

Florida: Enjoy Certain Freedoms and Individual Liberties

ENERGY FREEDOM ACT: Ted Cruz Introduces Bill for Energy Independence

Consequences of Biden Killing the Keystone Pipeline

Copyright © 2022 | Terms & Conditions | About Us | Dick Young | Archives