The Federal Reserve to Pensions: Suspend Disbelief Indefinitely

by Danielle DiMartino Booth
02-Nov (MoneyStrong, via LinkedIn) — Dissent is in the air. Soybean-export driven economic growth has given hawkish Federal Reserve policymakers a fresh raison d’etre to dissent in favor of an interest rate hike at today’s meeting. Hike today or be buried in regret for having been behind the curve. It’s true that (measured) inflation does indeed appear to be emerging from an extraordinarily long hibernation.

But it sure would be nice to hear news of a different kind of dissent, one cast on behalf of those whose voices have been lost, that of savers and especially those of public pensioners.

Setting aside the corruption of the pension system for a moment in this overheated political season, some brave soul among current Fed leaders should long ago have raised their hand to protest the ravages that will be suffered one day as a direct result of Fed policy keeping rates too low for too long for several generations, and worse, forcing pension managers too far out on both the liquidity and risk spectrum.

…if you assume your investments are going to return less, you (the state/school district/municipality) have to write bigger checks to ensure the pension has adequate funds to satisfy what retirees and future retirees have been (over)promised. The fact that interest rates have declined precipitously, even using the ridiculously high rates allowed by law, you start to see what’s got all those analysts over at Moody’s so worried.

Add up all our great states and Moody’s math comes up with $1.75 trillion in what will be pension underfunding by the time we’ve said adios to fiscal year 2017. That represents a 40 percent jump from fiscal year end 2015. On a fundamental level, it is poor investment returns and insufficient contributions that have landed pensions in this pickle. “Poor” might be a bit kind considering the median return for state pensions in the last fiscal year was 0.52 percent, again, compared to a 7.5-percent assumption.

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PG View: A 40% increase in the underfunding of pensions is astonishing and will be a millstone around the neck of our economy for decades to come.