U.S. Public Pensions: Victims of Rosy Future Predictions?
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What is the main topic discussed in this episode?
Here's your money briefing. I'm J.R. Whelan at The Wall Street Journal in New York. Pensions aren't the most exciting thing to talk about unless the money isn't there that's supposed to be coming to you. And that's a real problem facing public pensions. In a moment, we'll examine how the system got there. First, some money in market news you should know. The Journal's Heard on the Street team says the second quarter economic growth rate of 2.1% may be seen as a slowdown, but the economy may be doing just well enough to ward off a second interest rate cut by the Federal Reserve. Heard in the streets, Justin Layhart says the economic report highlighted the divide that has opened up between confident consumers and worried businesses.
And while the Fed is worried that business jitters could bleed into other areas of the economy, most notably the job market, as long as the labor market stays strong and consumers keep spending, those factors will outweigh a potential second-rate cut that would ease fears that a slowdown overseas is becoming contagious. And more than 10,000 people who hold cryptocurrency
What is the current funding shortfall for U.S. state and local public pensions?
started getting letters from the IRS late last week. They're being warned about penalties for failing to report income or pay tax on transactions involving virtual currencies. In March of 2018, digital currency platform Coinbase provided data under a federal court order to the IRS on about 13,000 accounts, though the IRS won't confirm the letters being sent out stem from information supplied by Coinbase. For federal tax purposes, cryptocurrencies such as Bitcoin are treated as investment property similar to stock shares or real estate.
What do American state and local pensions have to do with the finest crystal around? Well, pension funds may have had a tint of rose in their crystal balls when predicting the future, and that could be why, on average, they have less than 75% of assets on hand to fund future obligations. I heard on the street editor Spencer Jacob is here to explain. So, Spencer, we're talking about pensions for public workers, and this shortfall could be the result of rosy economic predictions that the pension fund's managers make themselves?
That's right. So 75% doesn't sound that great, but 75% is what's based on their projections of how well they'll do. So there are a lot of people who have – not a lot of people anymore. There used to be a lot of people who had pensions through companies where a pension basically means that you know what you're going to get. You have a specific promise of what you're going to get. Most Americans have the reverse. You know what you contribute today. You might not contribute anything or not very much or not enough. And you count on that growing to some amount in the future that you can live on.
How do public pensions use discount rates to project future liabilities?
If you're a public employee, there's some amount that might be taken out of your paycheck or might be nothing. Your employer contributes. And that's supposed to grow. And they show you an account every year of how well-funded it is. On average, it's 75%. But that's based on how well they think it's going to do. They apply a discount rate to the future. And those discount rates are basically provided by a bunch of consultants that they hire. The column that I wrote today points out how incredibly rosy those assumptions are.
And by misgaging the future, that could put pension funds in a position to be more risky in hopes of registering higher returns. And by taking on more risk, then you're clouding your future even more.
That's right. And you see that more and more where they are saying, oh, we'd like to invest more in private equity. We'd like to invest more in hedge funds and things like that. Well, over the last 10 years, private equities had a really nice run. That's something that is more and more appealing to hedge funds. They see something that's done well and they say, we'd like to put more cash into this thing because it's done so well. I think people know that past performance not only isn't an indicator of future performance, but past performance is an indicator that maybe some of the best returns are behind you, especially when lots of people are piling into something.
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Chapters
5 chapters
1
What is the main topic discussed in this episode?
0:05–1:06
2
What is the current funding shortfall for U.S. state and local public pensions?
1:06–2:52
3
How do public pensions use discount rates to project future liabilities?
2:52–4:14
4
Why might consultants’ return assumptions for pensions be considered 'rosy'?
4:14–6:53
5
How can optimistic forecasts drive pensions toward riskier investments like private equity?
6:53–6:58
Speakers
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