The 8% pension plan solution

Marketplace Contributor Jul 4, 2012
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The 8% pension plan solution

Marketplace Contributor Jul 4, 2012
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Sarah Gardner: If you want to see some skyrockets today, try taking a look at the target return for a lot of pension plans — especially the yields that are promised to public employees. Some of them are guaranteeing returns as high as 8 percent. Say what? These days most investors are lucky to get a small yield. Government bonds have been paying record lows of maybe 2 percent, tops.

So what’s the magic behind these pension fund returns? As our senior business correspondent Bob Moon reports, could be a lot of smoke and mirrors.


Bob Moon: Pension experts are getting anxious about those supposed 8 percent returns, because the only way to generate that kind of growth is pouring cash into increasingly risky investments — including debt that you might know as “junk” bonds.

Economic consultant Anirban Basu has been tracking the pension funding shortfall for Baltimore’s Sage Policy Group.

Anirban Basu: Either you’re going to hit 8 percent by taking on big risks, or you’re going to fall short by not taking enough risk, and the worst possibility is that you take big risks and you get a negative 8 percent.

Translation: Pension fund managers are gambling retirement money on an elusive target.

Maybe you’re thinking that this doesn’t apply to you because you’re calling the shots on your own 401(k) plan. Those returns can always vary. But consider that public pension plans are increasingly reliant on that “magic” 8 percent assumption.

Andrew Biggs is a pension analyst at the American Enterprise Institute.

Andrew Biggs: The downside is that the benefits are guaranteed. So the taxpayer has to pay the benefits, regardless of how the investments turn out. If the investment returns turn south, then the taxpayer’s on the hook.

At Towson University, economist Daraius Irani warns when the payments come due, we could all feel the sting. Either that, or public workers need to brace for a much smaller retirement nest egg than they’ve been expecting.

Daraius Irani: There are some studies out there that show it could be somewhere about $1,300 per taxpayer to pay for all these pensions. I know many states and many localities are going to revise downward their pension obligations.

Those cutbacks would hit future employees. The experts we spoke to warn that politicians have kicked this can down the road about as far as they can, hoping to make it someone else’s problem, but the bill is now coming due.

I’m Bob Moon for Marketplace.

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