Friday, August 28, 2015

Questions will be raised - probably the wrong ones

In recent past postings, we showed the ups and downs of the stock market over the past few days in charts like the one below taken just a few minutes ago:
Rather than focus on the ups and downs over the past few days, note that when you look back over the past year, the market essentially hasn't gone anywhere. Public pensions have been reporting their rates of return over the year ended last June 30, the end of the fiscal year. Not surprisingly, the news reports focus on the fact that they didn't hit their long run target of 7.5%/annum.* Questions are then raised about whether - over the long run - pension funds will hit their target and what that means for calculating pension underfunding. There will be questions about whether the target should be lowered and what the lower target should be.

But there is another set of questions that is typically omitted. Given the fact that the stock market is volatile, why would you expect ordinary employees - who are supposed to be concentrating on their day jobs - to do a better job of putting away adequate funding for retirement - and investing what they do put away - than financial professionals? That's another way of saying, why should you push people into defined contribution pensions rather than defined benefit? If in fact 7.5%/annum is too high a target going forward and a lower rate should be assumed, how would ordinary folks know that in their planning? How would they know whether their implicit targets are the right ones? And what about the insurance aspect? When you pool risk, volatility tends to be smoothed out. There are folks who will be retiring at different times. New folks are entering; retirees are leaving. If everyone has individual accounts, there is no pooling. Note that the facile response that you can always stay on the job longer if things don't come out as planned may not work for folks who - perhaps due to an adverse health event - don't have that option.

Too bad the Committee of Two didn't ponder such questions. Too bad proponents of the pension initiative currently in circulation have no answers, even if they did ponder the right questions. Apart from what might be said in the public comment periods, will any Regents be raising the right questions at their upcoming September sessions? That's one question for which there is a clear answer.

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