Some state systems are required by law to remain solvent, and are empower to enforce that. For example, New York requires municipalities and other entities to make payments to cover lower returns within a year or two by law.
Other states, like most infamously Illinois, have no such requirement and their systems are essentially insolvent, barring the Federal government bailing them out.
Taxpayer funded defined benefit pension funds assume 6% to 8% returns. Non taxpayer funded defined benefit pension funds are required to use high grade corporate bond yield curves, in the 3% to 4% range. Roughly 1% change in the assumption of return on assets results in 15% of change in liabilities.
NY is an outlier in terms of its defined benefit pension governance, but the way most taxpayer funded pensions currently work, they are vehicles for pushing 30%+ of today’s defined benefit costs onto future taxpayers.
This is really what it will come down to. Real interest rates are falling to 0. The fed can prop the markets up to guarantee any paper return or simply let pensions etc go bust.
At some point the economy will need to rebalance assets in order for interest rates to rise, but there is no preordained condition that requires this to occur.
Classifying a pension fund’s expected return on assets to be a legal obligation to earn that much is a stretch.
The pension fund’s board could just as easily use a lower expected return on assets, but you are correct that using a higher than reasonable return assumption transfers debt from yesterday’s taxpayer to tomorrow’s taxpayer, and that is by design since future taxpayers are not particularly strong voting blocks. And it does cause pension fund managers to gamble on riskier and riskier “investments”, since the alternative is raising taxes and lowering return assumptions to make up for the shortfall and who likes that.
You act as if reducing the rate of return is a simple maneuver. This is politically fraught as it automatically requires employees to contribute more money.
It is relatively simple, as in no laws need to be passed or anything. The pension board could decide to match the PPA 2006 standards the government requires for non taxpayer funded DB pensions anytime it wants.
They will not though, since that would increase their own taxes, and of course start a political firestorm.
I disagree in classifying it as a legal mandate, because that makes it seem like there is some type of law forcing pension fund boards to invest in risky assets. I am not aware of any state law that says the pension fund has to use excessively high return on investment assumptions. State law might say that taxpayers have to prioritize defined benefit pension benefits in the event the pension fund run out.
Ironically, the only law about return on investment assumptions is on non taxpayer funded pension plans via ERISA and PPA 2006. I cannot help but think the only reason taxpayer funded pensions have different rules is so future taxpayers can be fleeced.
The distinction is important, because the reason the pension fund boards invest in risky assets is not due to the law (aka legal mandate), but rather today’s taxpayers wanting to push today’s labor costs onto future taxpayers while not stating it on official reports so that the responsible actors can maintain plausible deniability.
