nisiprius wrote:Two big questions are 1) whether individuals will act on it, or will they simply ignore or ditch the sources of advice who tell them this and listen to sources of advice (like Dave Ramsey!) who say no problem getting 12%/year?
2) What will institutions, notably pension funds, do? Apparently they have all been baking in unrealistic growth assumptions for a long time. Will they actually scale them back, or will they stick with assumptions that are becoming even more unrealistic, and face the consequences later?
The accounting standards Board and the SEC are much tougher on the private sector than the public, as I understand it.
As a result those remaining private sector DB schemes have at least some chance of having realistic assumptions, and the size of the deficits are quite real.
Whereas apparently with public sector schemes there's been a lot of fiction writing going on. Illinois is in the worst position by most measures (I mean, really, bad). I have my own worries about things like MTA in New York (but have NOT looked at it closely). Illinois used some clever trick of issuing bonds at one interest rate, then investing them at an assumed higher rate (an assumption) in its pension plan. This will end well, I am sure.
As the movie title went "There Will Be Blood". There were excessive pension promises relative to likely returns. Then trustees and managers used excessively high expected rates of return to justify not increasing contributions. At some point the contributors (aka taxpayers) and the beneficiaries are going to have to meet each other-- expect real pain when that happens.
To achieve those, they began to gamble with leveraged investments "alternatives": hedge funds, private equity, infrastructure, real estate. Turns out that that is risky and post fees, may not generate the desired returns (big dispersion of performance depending on manager and when invested). You saw the same sort of thing with people like Harvard Endowment-- they basically seem to have taken a leveraged bet on markets (and Larry Summers is alleged to have more than encouraged that, practically ordered that, a gross breach of governance in the first place), just when the crash hit.
It is a bit like investing in road repair, or the Washington Metro. Washington Post had a long piece on the latter, for 40 years the Board of the transit authority has not wanted to hear bad news. Now there is a risk the whole system could be shut down.
Nobody gets the credit for solving a pension problem (or repairing a Metro tunnel, as opposed to opening a new station) yet, in fact, this is precisely what is needed.