There has recently been significant turmoil in the ongoing debate over public pension funds. Primarily the conversation has centered around what level of pension benefits should be guaranteed for workers in the future. There is also another issue that can be more subtle in nature- the rate of return assumed by actuaries that measure the adequacy of existing pension funds in relation to promised benefits.
The lower the assumed future investment rate of return used, the more underfunded a pension system is measured to be (and vice versa). The “rule of thumb” in the past has been to use historical average investment return figures. The question is- “are historical returns representative of future results or are we kidding ourselves?” We seem to agree with others in that it will be a more challenging world ahead- both for investment portfolios and personal financial planning.
Rules of thumb are generic, easy and fast- but also dangerous when plotting future financial results. To learn more about the debate, visit http://tinyurl.com/6eusmbd to see a timely Wall Street Journal article on the topic.
