Assume Nothing – Our Pension Crisis Is Looming

Calpers, a couple of years ago, lowered their assumptions rates from 7.5 to 7 percent. The assumption rate – in simple terms – is the rate which Calpers gauges their investment return on the pension funds. The funds, are paid out to present and future retirees.

In a perfect world, assumptions can be created; in reality, assumptions can create an enormous amount of damage.

In my opinion, I think this is why the Federal Reserve instituted its purchases of toxic assets  – to the tune of 4 trillion dollars – to avert an additional crisis. After the  2008 market crash, there were a number of private pensions that were imploding due to their investments. This signal was not ignored.

Which brings me to this point. What is going wrong?

In short, the answer is greed. Blame the brokerage firms and insurance companies for convincing people to switch out of bonds to equities and hedge funds. Pensions were created to secure the future income flow of retirees. This assumes that the underlying asset of the pension is stable; equities and hedge funds are not stable.

The only asset that should be the foundation of a pension should be US government bonds – in my humble opinion. But, to each their own. Which brings me back to Calpers.

Calpers and all of the other pensions funds are in deep trouble. The unfunded liabilities are enormous; I think Los Angeles, at the time of this writing, have unfunded pension liabilities of  9 billion alone. Multiply that by the number of cities and counties in California, and you have a major crisis.

The moral of the story is: don’t assume that everything will go your way.