Wednesday, July 20, 2016

Meanwhile, in the real world

A reminder of storms ahead:
California’s massive public pension fund has been severely underfunded and mismanaged for decades, but its accountants have managed to conceal the extent of the problem by assuming that the state-run asset manager would secure white-hot seven to eight percent returns over the long run. Independent analysts have estimated that at a more realistic rate of return of five percent, the fund would be over a trillion dollars in the hole. But the latest returns make even that figure sound like a pipe dream. 
CalPERS is hardly the only major pension fund that's going to come a cropper. A trillion dollars is a lotta money. To project 7-8% growth year-over-year is nuts, especially if your asset managers favor cronyism and politically correct investing strategies. It's going to get ugly when things go south, it might already be happening.


Bike Bubba said...

"Say, taxpayer, you don't mind working until you're 75 so we can retire at 50 or 55, do you?" "Yes, I know you wanted to replace your 20 year old car, but we've got our pensions here, donchaknow?"

Suffice it to say that if Nevada, Utah, Oregon, Washington, Colorado, and Arizona play their cards right, they could do very well as this train comes off the tracks.

Bike Bubba said...

Another thought is that a lot of money managers out in the private sector have noted, correctly but irresponsibly, that 7-10% returns are practical. They more or less pivot things around the post-WWII lull (where all available capital tended to go to war bonds) to the peak in the late 1990s....when I looked at things on a longer term, I got around 2-3% after inflation plus dividends....better than a poke in the eye with a sharp stick, but generally not 7-10%.

A long way of saying that finance guys tend to be optimistic, I guess, especially when they're trying to defend a system.