Sunday, August 7, 2016

Who would want to suppress an actuarial report on pensions?

Right now, public pensions discount future liabilities at 7.5%.  This means that cities and states that face a pension payout of, e.g., $100,000 in 25 years, must set aside $16,398=($100,000)/(1.075)^25.  If the pension fund invests $16,398, and earns 7.5%, then in 25 years the pension fund will have $100,000 to pay out (compounding).

HOWEVER, if the fund earns only 5% (a more realistic return), then the fund should put away $29,530=($100,000)/(1.05)^25, about 80% more than they are currently saving.

committee of actuaries who wrote a report pointing this out and suggesting a more realistic discount rate has been disbanded to prevent the report from leaking out.

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