WHEN it comes to funding the pensions of their workers, American states and local governments have not been doing a good job. Back in 2000, the average pension plan was fully funded, according to the Centre for Retirement Research (CRR); at the end of 2015, the official funding ratio was just 72%.
So a report from a pension-finance task force into the way economic principles apply to public pension funds ought to make compulsory reading. But the paper, commissioned by the American Academy of Actuaries (AAA) and the Society of Actuaries (SoA), is not going to see the light of day. That is very disappointing, since the report (a draft of which has been seen by The Economist) highlights how the approach to valuing American public pensions is highly questionable.
The big costs for pension plans lie in the future, as members retire and benefits are paid. Those costs must be discounted at some rate to the present day so those who run schemes know how much money to put aside. The higher the discount rate, the less money has to be put aside now; American public plans tend to use a discount rate of around 7.5%, based on…Continue reading