Pension Problems Growing Larger By The Year

Posted By on September 17, 2010

The median expected investment return for more than 100 U.S. public pension plans surveyed by the National Association of State Retirement Administrators remains 8%, the same level as in 2001   “It’s unrealistic,”  according to John Bogle, founder of mutual fund giant Vanguard.  He says the return assumptions in place at most pension plans can’t be meet.

The concern is that the reluctance to plan for smaller gains will understate the scale of the potential time bomb facing America’s government and corporate pension plans.

Pension funds at companies in the S&P 500 faced a $260 billion shortfall at the end of 2009, according to Standard & Poor’s. Estimates of the fund deficits faced by state and local governments range from $500 billion to $1 trillion.

Some plans are beginning to trim their return forecasts.  Earlier this month, New York State Comptroller Thomas DiNapoli said he would reduce the expected rate of investment return for his state’s pension system, the third-largest in the nation, to 7.5%, from 8%.


The country’s two biggest plans—the California Public Employees Retirement System, or Calpers, and the California State Teachers’ Retirement System, or CalSTRS—both are undergoing reviews of projected investment returns that could lead to reductions later this year.

Many plans have held onto an 8% return expectation though thick and thin. Such return assumptions partly reflect the heady years of the 1990s bull market. Public pension plans posted a median, annualized return of 9.3% over the past 25 years, but just 3.9% over the past 10, according to consulting firm Callan Associates.

Now let’s look at the average value of a retirement plan, IRA, or Keogh in America…….the 90 percentile has less then $50,000 in retirement, and around $80,000 puts one in the 95 percentile and that’s as of the end of 2007, but the average loss going forward from that point is 18% through the 1st quarter of 2010.

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