June 20, 2012
The PBS Newshour last night included a segment on state and local pension liabilities. While it included Josh Rauh, one of the people who has been most visible raising alarms about the condition of state pensions, it did not include the voice of anyone who was prepared to defend the financial situation of state pensions.
This meant, for example, that when Rauh told viewers that unfunded liabilities came to $9,000 for every U.S. household, there was no one to point out that this comes to less than 0.3 percent of projected household income over the next 30 years, the relevant time frame for paying off this unfunded liability. It is likely that listeners would be less concerned if they were given this additional piece of information.
There was also no one to point out that pension funds are simply assuming that their asset mix will get their historic rate of return when they assume an 8.0 percent. Contrary to Ruah’s statement:
“Anybody who’s looked at their own accounts lately know that that’s very difficult particularly in an environment where bonds, 10-year Treasury bonds are yielding 1.6 percent.”
A knowledgeable person could have reminded readers that the price to earnings ratios for stock have now fallen back to their long-term average. While it was in fact foolish for pensions to assume 8.0 percent returns when the PEs were inflated in the 90s and the last decade, as some of us pointed out at the time, it is difficult to construct a plausible scenario now where pension assets will provide a return that is much below 8.0 percent.
Unfortunately, because the show did not have a balanced panel, there was no one to make these points to viewers.
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