A pension crisis is occurring right now around the country for specific pension funds. Detroit comes to mind as well as Chicago. Most of the issues are with public pensions, of which Social Security is the largest. Of course current payments into Social Security are being used to fund current recipients. This will not continue for long as more and more people retire and fewer workers are contributing.
The main issue with viability of public pensions is the assumed rate of investment returns. On August 1, the American Academy of Actuaries and the Society of Actuaries shut down a 14-year-old task force on pension financing when several members were about to publish a paper that found many state and local retirement systems calculate their obligations using overly optimistic future rates of return. The task force concluded that the assumed rates of return artificially improved the projected ability of the funds to meet their obligations. The AAA and SOA threatened members of the task force if they independently published their analysis.
Private pensions are in somewhat better condition since they are required to use a "risk free" rate of return based on U.S. Treasuries to project the future growth of their assets. Public pension funds can pick an arbitrary higher rate, which they often do. Government pension funds on average estimate they will earn 7.6% annually. Elected officials, otherwise known as politicians, adopt overly optimistic rates of return that allows them to offer public employee benefits that seem affordable and attractive.
More analysis is available in today's Wall Street Journal.
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