Friday, June 28, 2013

Moodys is Right On

Moodys released a report on state pension funds today that implied that such funds currently hold only 48 cents out of every dollar needed to properly fund their obligations.  Three cheers for Moodys!

For decades, state and local pension funds have released grossly misleading and inaccurate figures suggesting that they are better funded than is merited by the facts.  Politicians have acquiesced in this charade since it was inconvenient, to use Al Gore's phrase, to speak the truth.

The chief method of disguising the truth is to make over-optimistic assumptions about future asset returns and unrealistic assumptions about the contributions that will be forthcoming in the future.

Based upon false information, state and local governments have touted reforms that hardly make a dent in the real problems.  Virginia is a great example.  The so-called pension fund reforms enacted by the Virginia General Assembly and backed by Governor McDonnell were misleadingly hailed as a 'major' improvement in funding.  Nothing could be further from the truth.  By maintaining mostly a defined benefit system supported by optimistic and unrealistic assumptions, the Virginia reforms simply locked in concrete a failing system without any serious reform.

The only properly funded pension systems are defined contribution systems.  Period.  If you are a participant in a defined benefit system (social security is a good example), the best advice for you is to start saving as much as you can.  Your pension system is most likely in deep, deep trouble.

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