Pie-in-the-sky investment expectations have long helped public pension systems disguise the reality of their taxpayer obligations. By assuming overly generous returns over the long run, government retirement programs camouflage the wide gap between what they have promised and what they actually have.
In late 2016, Moody’s put the shortfall at $1.75 trillion nationally.
But stricter accounting rules, along with heightened scrutiny of these ticking taxpayer bombs, are leading many states, including Nevada, to re-evaluate the optimistic assumptions underpinning these systems. Will it be enough?
On Thursday, the board governing the Nevada Public Employees Retirement System will consider lowering the return expectation on its investment portfolio for the first time in more than 30 years. Since 1984, PERS has assumed 8 percent annual earnings; the new proposal would drop that to 7.5 percent. “Most funds are headed in this direction,” said Tina Leiss, an executive officer in the system. “It does take a little risk off the table if you can do this.”
While a step in the right direction, the lower assumption may still be unrealistic, as an August report in Bloomberg Businessweek suggested.
“If you walked into a pension fund today which had no investments, and you were given a pile of cash and you invested today intelligently, prudently, but not shrinking from risk,” an owner of an asset management company told the magazine, “I think you could expect to make something in the vicinity of 5 percent in the coming years.”
But 5 percent will never happen, in large part because that would destroy the illusion of solvency and further erode support for the generous, defined-benefit government retirement systems unavailable to the private-sector grunts forced to pay the bills. In addition, politically powerful public-sector unions make significant contributions — courtesy of the taxpayers — to Democratic lawmakers, who, in turn, vehemently resist serious discussions about the fiscal realities of government pensions.
“Public pensions are wary of lowering their expected return rates … too quickly because doing so would drastically increase costs for state and local governments and their employees,” noted a recent Reuters report. In other words, a more realistic approach could trigger a taxpayer revolt.
And as pension funds kick the can decades into the future, the potential impact of shortfalls, relative to government tax revenue, gets larger and larger. The Rutherford Institute found that the number “is now more than three times as large as it was in 1995, and about 10 times as large as in 1985,” Reuters reports.
Setting more sensible investment expectations is a worthy goal, and PERS should do so. But in the long run, the only way to address the massive funding gap is to implement comprehensive reforms that include attacking lavish benefits and moving new government hires into a defined-contribution system like those found in the private sector.