November 12, 2014
That is what millions are asking after reading its piece on the financial status of Detroit’s pensions following its bankruptcy. At one point the piece tells readers:
“Contributions to the system will not be nearly enough to cover these payouts, so success depends on strong, consistent investment returns, averaging at least 6.75 percent a year for the next 10 years. Any shortfall will have to ultimately be covered by the taxpayers.”
Actually the returns to the pension do not need to be consistent, they need to be on average 6.75 percent a year. Having a year or two of low or even negative returns does not matter as long as they are offset by years of stronger than average returns. The assumed 6.75 percent nominal return is in fact considerably lower than the long-term average for public pension funds, although given current stock valuations, it may be a bit on the high side. (High price to earnings ratios imply lower future returns.)
It would also have been worth noting the extent of the pension cuts that Detroit workers already incurred. Workers agreed to a 4.5 percent across the board cut in pensions. In addition,they gave up a 2.25 percent annual cost of living adjustment. For a retiree who collects her pension for twenty years, this amounts to an almost 18 percent cut in benefits.
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