If you are relying on a pension fund in a blue state, you’re being played. Blue states that have mismanaged their fiduciary obligations are playing the country, waiting for the finish line, aka a federal bailout.
The expected return targets of most of these pensions are 7%, on balanced portfolios. You can see from the chart of 10-year Treasuries below that the current state of fixed income is not supportive of those expectations. So pension managers must be relying on the stock market, which has recently endured its third major collapse in less than twenty years.
The return expectations pension managers are setting are a dream and need to be reduced.
Heather Gillers explains in the Wall Street Journal that, despite record second-quarter gains for many of these funds, they’re still falling short of long-term targets. She writes:
Double-digit stock gains pushed pension returns to a median 11.1% for the second quarter, according to Wilshire Trust Universe Comparison Service.
Even with the rebound, median annual returns for the public pensions whose fiscal years ended June 30 were 3.2%, far short of the funds’ long-term investment-return target of around 7%.
“That’s the funny thing with math, if you go down 20%, a 20% return does not make it up.” said Robert J. Waid, managing director at Wilshire Associates.
Before the pandemic, public pensions were already trying to plug large funding holes by pursuing aggressive returns to make up for insufficient government funding in past years and decades. State and local pension funds in the U.S. held $4.05 trillion in aggregate as of March 31—$4.93 trillion less than the cost of promised future obligations, according to Federal Reserve data.
Investment shortfalls drive up the amount state and local governments have to pay in. Funds are also bracing for coronavirus-related government-revenue losses.
That last line is the key to understanding the motivations of pension funds. The higher their targets for returns, the fewer tax-dollars politicians are required to divert from pet projects to save for retirees. Politicians are highly motivated to hire fund managers who will set high expected returns, because they allow state and local governments to spend elsewhere, while promising pensioners the moon. That works, until it doesn’t.
Don’t live at the mercy of a blue state government. Instead, Survive & Thrive by getting serious about your own personal and financial security. Sign up for my monthly Survive & Thrive newsletter by clicking here. But only if you’re serious.