A surprising reason dissident actuaries advocate using a much lower earnings forecast for public pension investment funds is “intergenerational equity,” ensuring that the pensions of government workers are paid by the generation that receives their services.
A recent paper by the dissidents does not mention the usual criticism that pension earnings forecasts are too optimistic, not likely to be achieved, and hide massive underfunding. When the earnings forecast is lowered, pension debt or the “unfunded liability” goes up.
For example, the “California Pension Tracker” website shows California public pensions in 2013 with a debt of $281.5 billion when a typical 7.5 percent earnings forecast is used. Drop the earnings forecast to 3.7 percent and the debt soars to $946.4 billion.
The paper’s authors are dissidents because they follow the principles of mainstream financial economics, not standard actuarial practice, when they advocate a risk-free earnings forecast to discount debt for guaranteed pensions, something like a U.S. Treasury bond.
“Our analysis seeks to maximize efficiency and preserve intergenerational equity,” said the paper issued by the dissidents last August. “We conclude that full funding based on default-free discount rates is efficient and fair across generations.”
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