Pennsylvania’s public pension obligations amount to about $50 billion right now. The figure is partly a fiction, dependent on a number of variables.
One of them is how much it’s assumed the pension funds will make on investments.
The commonwealth’s two pension systems (state employees and teachers) assume a 7.5 percent rate of return on investments. The rate is right in line with what many other states’ public pension funds assume.
But some economists, especially conservatives, argue it is unwise to count on those kinds of returns.
“You know, you’re assuming things that may or may not take place in the future. I mean, there’s no guarantee that comes with this,” said Jim McAneny, director of the state Public Employee Retirement Commission, which analyzes any pension-related legislative proposals.
Then again, if the rate of return were lowered, actuaries would suggest higher state contributions to the pension fund. The commonwealth would have to kick in more money, up front, to pay for retirement benefits. The state is already shirking on its contributions.
“We’re not putting in what we’re supposed to put in now,” McAneny said. “You’d have just a bigger shortfall. The reason why our debt is growing $10 million a day is not because the assumptions are too high – it’s because the contributions are too low.”
In the past few years, both of Pennsylvania’s public pension systems lowered their assumed rates of return from 8 to 7.5 percent. The changes added more than $6 billion to the state’s unfunded pension liability.
The National Association of State Retirement Administrators recently published a report indicating investment returns tended to exceed assumed rates except in the wake of the 2008 recession.
But Richard Dreyfuss, an actuary and an adjunct fellow at the Manhattan Institute’s Center for State and Local Leadership, questions the “reasonableness” of Pennsylvania’s assumed rate.
“The related question,” he said, “is what are the expected returns by asset class (stocks, bonds, venture capital and real estate) that support a composite return of 7.5 percent or better?”