Projections and Pension Funds

Interesting article today at SeekingAlpha today (here). Scroll down to the part about the Chicago pension fund. It’s starting to become public knowledge that many pension funds are underfunded or will become so soon. Notice the part about those funds return expectations. Many of these funds need a high return (some 8-10%+) in order to keep up with their future commitments. 8-10% ain’t happenin’ right now and at least according to Lass, historically never happens with any kind of regularity for these types of funds.

When you model anything, you have to make assumptions. Not only do most models never incorporate the “down-side”, they generally incorporate positive growth as a base level assumption. Something like a pension fund that requires that type of growth in its models is extremely problematic because policy decisions up and down the food chain (ALL the way up and down) are based on the future solvency of them. When the models (the almighty black and white) show artificial solvency, and then that changes, the domino effect is drastic. Positive growth economic modeling, in addition to modeling of very low cost of borrowing money to fuel such growth, has created a Hydra-like monster — the Wall Street Journal headlines of today.

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