Wednesday, November 9, 2011

Pension plan day of reckoning is 15 years away...

I've talked about how state pension plans are underfunded in both obvious and not so obvious ways.  The obvious way is that even with their return assumptions, they are often unable to meet their promised obligations.  The not so obvious way is that they use a high rate of return (usually about 8%) to find the present value of what they owe.  Because their obligations are virtually riskless, they should use a much lower rate, which would result in these obligations having a much higher present value.

In this article - Josh Rauh, who has done a lot of work on this topic, predicts that we've got about 15 years to go before this all blows up.