Making Up for Pension Losses


For a recent home project, I was looking into the practical differences of decibel levels, and it’s easy to find charts of comparisons.  If some home product comes in at 50dB, it’s like a quiet conversation at home, which may or may not be worth some extra expense to avoid a 60dB product, which would be more like the level at which one has to talk at a busy restaurant.

Back when I worked in construction and was a bit obsessive about various materials, I often looked for similar charts for the risk level of various common dangers.  If I’m told to go frame some walls in a space that the plumbers recently contaminated by carelessly removing asbestos, am I being asked to do the equivalent of smoking a pack of cigarettes or gargle liquid mercury?

Probably for reasons of liability, such guides aren’t easy to find, but I bring the notion up in this post because it seems to me a helpful framework in which to understand the job of journalists.  In general, their job is to keep us informed in a way that conveys with relative efficiency the significance of current events.  If something happens, or if government gets some result, how big a deal is it?  How should that weigh against other priorities, not only for governance, but for our limited available attention?

In practical terms, the reason reporters should find multiple sides to stories isn’t so much out of some sense of fairness, but so that readers have various points by which to measure the claims of each against the other.

An example from the Providence Journal today brought this to mind.  Patrick Anderson writes about a positive return on the state’s pension fund, in the last fiscal year:

Rhode Island’s pension fund earned an 11.62-percent investment return in the fiscal year that ended June 30, reversing losses from the previous year and pushing its value back over the $8-billion mark, General Treasurer Seth Magaziner announced Wednesday. …

Last year, the pension fund’s investments lost 0.27 percent of their value.

This doesn’t capture the issue.  As I’ve explained before, the break-even, neutral point for pensions in Rhode Island isn’t zero; it’s 7.5%.  All of our pension planning requires that to be the average return.  So, while an 11.62% increase this year more than makes up for the 0.27% loss last year in terms of actual dollars, that isn’t the target.  We needed this year to make up for last year’s loss plus the return we need this year plus the return we would have gotten by investing the money we were supposed to gain last year.

Two ways to look at it:  The 0.27% loss wasn’t actually a 0.27% loss, but a 7.77% loss versus what we needed; similarly, the 11.62% gain is really only a 4.12% gain.  Consequently for every $100 we invested two years ago, we’re still $4.24 short of where we should be this year, and we’ll need another year at 11.6% year just to get back to where we should be when next year starts.

  • BasicCaruso

    Of course the real takeaway here is that focusing on short-term gains and losses lead to all kinds of bad decision making. It’s cooler this week than it was last week. Summer is over. Bust out the jackets!