Monday, August 22, 2016

The Pension Reform Battle in Virgina

Once again, the effort has been joined to reform the state retirement system in the Commonwealth of Virginia.  According to the current VRS (Virginia Retirement System) Board, the system had an unfunded liability of $ 22 billion as of June 30th, 2015.  This number, $ 22 billion, assumes that the system will reap a rate of return on its investments that no serious person believes -- 7 percent annually.  While the S&P 500 may well achieve 7 percent annually and has in the past, the VRS asset allocation, loaded up with high fee and low performance investments has no chance of achieving these kinds of returns.

The fiscal year for VRS is July 1 to June 30.  For the year ending 2015, VRS clocked in at a 4.7 percent return, while the S&P 500 was up 7.5 percent.  For the year ending 2016, VRS clocked in at a 1.9 percent return, while the S&P 500 earned just under 4 percent. 

So, at least there is some consistency in VRS results -- VRS investment returns dramatically fail to come close to either the 7 percent assumption or the S&P 500.

S&P 500 returns are almost trivial to achieve in practice, with almost no fees, thanks to Vanguard Mutual Funds.  Elmer Fudd could get the S&P 500 returns without breaking a sweat.  But, the VRS spends more than $ 300 million annually in investment fees and expenses to accomplish its dismal investment performance.

Meanwhile, the benefits to employees accrue only to those who stay until full retirement.  If you leave early, through no fault of your own (to take care of a sick relative, for example), the system strips you of more than half of your benefits and, in most cases, leaves you with 25 percent of what was coming to you.  Public school teachers are the main victims of this punitive system.

The simple solution is to let employees choose what they want to do.  Let them decide whether defined benefit is what they need or whether they might prefer to enroll in defined contribution.  That would put employees in the driver seat about their future, instead of being routinely punished for things beyond their control and about which they are inadequately informed.

But the nanny state may not go along.  Instead, Republicans and Democrats alike favor the Detroit system, where you promise, promise and promise, and then leave the employees and taxpayers with little or nothing.  The theme seems to be: as long as disaster doesn't happen on my watch, who cares.  Pretty cynical view about folks who need to prepare for their future.

Today is the second meeting of the Reform Commission in Richmond, Virginia to tackle these issues.  Maybe, something good will come of it, but, if past is prologue, don't hold your breath.

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