CalPERS cuts discount rate to 7 percent

The nation’s largest public pension plan, CalPERS, just adopted a plan to reduce their 7.5 percent assumed rate of return to 7 percent over the next three years.

One board member described the rate reduction as “giving us a chance to be a leader in the nation in responsible pension funding.”

It is a move that the Public Employees’ Retirement System of Nevada (NVPERS) should seek to emulate.

At 8 percent, NVPERS assumed average annual investment return is one of the highest in the nation.

The use of inappropriate investment rates increases the likelihood that future generations will be burdened with the cost of past debt — much like what has already happened to current NVPERS members — while also exposing the fund to potential insolvency.

This is why over 100 countries require pension plans to use discount rates based on bond yields — similar to the approach required for U.S. private pension plans — which results in rates ranging from approximately 3.5 percent to 6 percent.

Even the pension plan at Warren Buffett’s Berkshire Hathaway only forecasts a 6.5 percent assumed rate of return on its investments. 

In other words, NVPERS investments must outperform Warren Buffett in order to generate sufficient funds to make good on the promises made to retirees.

That’s one risky bet. 

Robert Fellner is the director of transparency research at the Nevada Policy Research Institute.


 


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