Censuring actuaries for telling the truth about the pension black hole

Last week I wrote on “The Public Pension Black Hole”. In the report I wrote the beauty of pension accounting is that slight tweaks can make a large unfunded liability
seemingly disappear or at the very least shrink it to “she’ll be alright mate” levels.

The American Academy of Actuaries (AAA) & Society of Actuaries (SOA) have disbanded the Pension Finance Task Force (PFTF)  objecting to a paper that showed the true extent of how underfunded US public pensions  are. It seems that using more appropriate return levels of 2% would mean that the unfunded public pensions would be around $8.4 trillion. Using our previous 1.71% 20 year bond yield as a proxy, it seems that my initial back of the envelope calculation was too optimistic. I calculated that the unfunded portion was around $7.5 trillion. Seems it is closer to $9 trillion or 50% of US GDP.

Pensions &  Investments reported that ”

“One of the assertions of the paper is that public pension plans are purported to be default-free obligations so they would be valued using default-free interest rates,” said a former member of the task force, who asked for anonymity.

Current public plan practice uses the long-term investment return of assets to value liabilities. The paper “challenged” that practice, said Mr. Bartholomew, a Washington-based independent pension consultant and former chief financial officer of the Inter American Development Bank, Washington, who helped oversee its more than $3 billion defined benefit pension plan.

“The issue came to a head with our attempt to get the paper published,” Mr. Bartholomew said.

When the academy and SOA leadership made their objections to the paper known, the authors offered to remove the task force label and have the society publish the paper under co-authors’ names only, while having side-by-side critiques written by actuaries opposed to its conclusions, members of the former task force said. But the academy and society refused to agree, the members said.

A financial economics approach using a risk-free rate, for example, of 30-year Treasury securities at a 2.5% yield compared to the current standard actuarial practice using a general 7.5% rate would add significantly to the liabilities of public pension plans, members of the former task force said.

”One of the purposes of the task force was to educate the actuarial profession in the same finance used by everyone else and bring them on board on that” approach, Mr. Bartholomew said.

It seems that the State of Illinois is warning that if marked to market its unfunded liabilities are around $111bn or around one quarter of CalPERS $412bn hole. What we know is that at some stage these pension funds will eventually run out of money if nothing is done. Sure we can pray for inflation to wash the black hole away but it seems higher taxes and/or lower pensions are on the new menu.

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