Last week the State Employee Retirement System (SERS) took a baby step toward reality and lowered their estimated return on investment (ROI). SERS moved their estimated ROI from 7.5 percent to 7.25 percent. The SERS change matches a move made by the other state-managed retirement fund, PSERS, last year. Adjusting the estimates added about $3 billion to Pennsylvania’s unfunded pension liabilities. These changes don’t go far enough, unfortunately.
A 2014 "Blue Ribbon" report from the Society of Actuaries stated that the rate of return for public sector pension funds would be closer to 6.4 percent for the next ten years. Actuarial assumptions may sound dull and boring. However, the assumptions that the state-run pension plans make in valuing their assets have real world consequences for taxpayers and reflect a major problem with the defined benefit (DB) model.
Because the assumptions used to determine the value of the pension plan assets and liabilities are influenced by politics, it is easy for politicians to make generous promises and then make legal whatever flawed assumptions they want to use to improve the outlook. Furthermore, they can change the laws to purposely underfund pension contributions (something they’ve done twice in the last 15 years) to pass a "balanced" budget.
By assuming an unreasonable ROI, SERS and PSERS are hiding over $15 billion in additional unfunded liabilities from taxpayers and lawmakers. An accurate picture of how challenging the pension funding situation is is a necessary part of discussing how to solve the problem. Imagine having a broken leg but asking a doctor to fix the problem using an x-ray of your arm, and that is what the state pension funds are doing by being overly optimistic about their ROI.