The current stock market volatility is another reminder of the precarious position of public pension systems, including Nevada’s plan for state workers. That’s because public pensions invest heavily in volatile assets, like stocks.
Across the country, state and local pension plans are only 73 percent funded, according to a review of 180 plans by the Center for Retirement Research at Boston College. The Public Employees’ Retirement System of Nevada does slightly better, coming in at around 75 percent funded. But neither statistic is encouraging.
“State and local pension plans have about $4.4 trillion in assets according to the Federal Reserve,” The Wall Street Journal reported last week, “$4.2 trillion less than they need to pay for promised future benefits.”
Imagine the uproar if pension plan officials announced they were going to pay out only 75 percent of promised benefits. Yet that’s all the assets most of these pension plans currently have — assuming they hit their investment assumptions.
This is especially concerning, because pension systems are riding a 10-year-wave of positive investment returns. The S&P 500 has more than tripled in value since the beginning of 2009. If pension systems are only 75 percent funded after a decade of healthy growth, what happens to the unfunded liability during the next downturn?
Pension managers, however, assure the public that there’s nothing to worry about. To make up for the deficits and growing obligations, they assume pension plans will earn a 7.4 percent return, on average. Nevada PERS assumes annual returns of 7.5 percent.
In fact, these projections disguise the real problem by likely underinflating long-term obligations by overestimating portfolio performance. Thirty years ago, a level of return of around 8 percent may have been realistic. As the Wall Street Journal reported last month, a 30-year U.S. Treasury bond had a return rate of almost 9 percent in 1987. This week, the yield on a 30-year U.S. Treasury bond was 2.25 percent.