Wednesday, March 14, 2012

California Dreamin'

For a truly outstanding example of wishful thinking, check out this article on pension fund behemoth Calpers. Faced with pathetic returns on its investments, the California fund appears poised to do what many other pension funds have already (grudgingly) done: lower the expected rate of return it receives on its investments.

Despite record-low interest rates, the median state pension plan in the U.S. still assumes an annual rate of return near 8%, which is a bit like the median American housewife assuming a date with George Clooney; it ain’t gonna happen.

So, ever so slightly, public pension plans have been trimming their expected rates of return. Calpers’s pension and health benefits committee has recommended an assumed annual rate of 7.5% -- just a smidgen below its current level of 7.75%.

And how, you might ask, does that compare to Calpers’s actual rate of return?

For the year ended Dec. 31, Calpers earned a whopping return of just 1.1%.

Nevertheless, Calpers’s chief actuary said the 7.5% rate was prudent, and said Calpers has a 50-50 chance of meeting that goal.

Right.

So years from now, if there is a gigantic shortfall in California’s pension funds and retirees go begging, many excuses will be offered - but remember: it all started with wishful thinking.

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