Pension Funds in Blue States are Playing You

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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.

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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.

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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. His first drum set was a 5-piece Slingerland with Zildjians. 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 To sign up for my free monthly Survive & Thrive letter, click here.