March 9, 2010
-- by Dave Johnson
Low interest rates are a tax on people who save money. And they are a subsidy for the big banks. They are just one more Wall Street bailout.
Holding interest rates as low as they are causes hardship for many. It makes savers look for higher returns. Retired people who were lucky enough to put money away can't afford to get by. It causes people to take risks like putting money in the stock market, where it can be lost. It makes people susceptible to scams.
But the consequences can be a lot worse than that. Read this: Public Pensions Are Adding Risk to Raise Returns
But states and other bodies of government are seeking higher returns for their pension funds, to make up for ground lost in the last couple of years and to pay all the benefits promised to present and future retirees. Higher returns come with more risk.
“In effect, they’re going to Las Vegas,” said Frederick E. Rowe, a Dallas investor and the former chairman of the Texas Pension Review Board, which oversees public plans in that state. “Double up to catch up.”
. . . Most have been assuming their investments will pay 8 percent a year on average, over the long term. This is based on an assumption that stocks will pay 9.5 percent on average, and bonds will pay about 5.75 percent, in roughly a 60-40 mix.
They assume 8%? Who is kidding who? Everybody knows this is not realistic, but they are allowed to keep the assumption on the books.
“Nobody wants to adjust the rate, because liabilities would explode,” said Trent May, chief investment officer of Wyoming’s state pension fund.
This is the same thing as allowing banks to not "mark to market" their mortgage portfolios. Everyone knows the banks are insolvent, but they are allowed to keep from writing down these toxic assets. Or the government buys them up from the ones with political influence...
Just HOW bad is the problem?
Colorado has been assuming its investments will earn 8.5 percent annually, on average, and on that basis it reported a $17.9 billion shortfall in its most recent annual report.
But the state also disclosed what would happen if it lowered its investment assumption just half a percentage point, to 8 percent. ... the plan’s shortfall would actually jump to $21.4 billion.
So they are reporting a $17.9 billion shortfall if the assumption is a fantasy 8.5% return. If they lower that to a still-fantasy 8% assumption they would have to report a $21.4 billion shortfall.
So just how bad would it be if they reported an honest assumption?
We are not out of the financial crisis until all of the accounts are honest and transparent.
Posted by Dave Johnson at March 9, 2010 8:52 AM
Maybe the pension systems are paying too much out in benefits. Seems like the public pensions are all woefully underfunded based on the promises they have made to public sector workers. The public sector will have to create new tiers, raise retirement ages, increase employee contributions or a combination of those to make payments to future beneficiaries.
Low interest rates (and low inflation) are good for anyone who is currently retired, and borrowing money for houses, cars or college. If interest rates were higher, it would mean that inflation is higher.
Over the long term, stocks have outperformed all other asset classes.
Posted by: Muckdog at March 9, 2010 9:10 PM
Well, we have the view from Wall Street. Put money in stocks, cut pensions especially for public employees, make people retire later, etc.
Meanwhile, the bonus pool for Wall Street was $150 billion just this year. And the wealth of the country is concentrated among just a top few.
The interest rates I am talking about are from the Fed.
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