I recently read this Lance Roberts article about the unavoidable pension crisis posted on Zero Hedge. The article discusses the investment rate of return assumption that I have focused on in my posts on PERS:
The biggest problem, following two major bear markets and sub-par annualized returns since the turn of the century, is the expected investment return rate.
Using faulty assumptions is the lynchpin to the inability to meet future obligations. By over-estimating returns, it has artificially inflated future pension values and reduced the required contribution amounts by individuals and governments paying into the pension system.….
However, the reason assumptions remain high is simple. If these rates were lowered 1–2 percentage points, the required pension contributions from salaries, or via taxation, would increase dramatically.For each point reduction in the assumed rate of return would require roughly a 10% increase in contributions….
Given real world return assumptions going forward pension funds SHOULD lower their return estimates to roughly 3-4% in order to potentially meet future obligations and regain some solvency.
But we won’t get there.
- This would require a 40% increase in contributions by plan participants which they simply can not afford.
- Given that many plan participants will retire LONG before 2060 there simply isn’t enough time to solve the issues, and;
- The next bear market, as shown, will devastate the plans abilities to meet future obligations without massive reforms immediately….
It’s an unsolvable problem. It will happen. And it will devastate many Americans.
It is just a function of time.
Mississippi PERS participants who are still working should be saving for retirement outside PERS. You should assume you will take a haircut on your PERS benefits.
I know you think you have a contract with the State. Hopefully, you will not take the assumed haircut. But better safe than sorry.
If I was a PERS participant, I would assume a 20% haircut on my retirement benefits and plan accordingly. That means save more for retirement outside PERS or plan on having less money to spend in retirement.
It’s like planning for a Hurricane. Hope for the best. Plan for the worst.