Not to go all pensions, today, but the response of Democrat General Treasurer Seth Magaziner, quoted in Katherine Gregg’s recent Providence Journal article, is so wholly inadequate that he ought to be made to spend the next week of news cycles backtracking:
Asked by The Providence Journal on Wednesday if the time had come to reduce, once again, the state’s investment-return projection, state General Treasurer Seth Magaziner said: “The assumed rate of return reflects an expectation for the average performance of the pension system over the long-term; we do not expect the pension fund to meet this target each individual year.”
When questioned about the significant gap between projections and performance, he said: “Our actuary has recommended that the current investment assumption remain in place for the time being, but we will continue to evaluate the situation.”
Anybody who’s read through a handful of actuaries’ pension reports will suspect that the assumed rate of return is not recommended by them, but rather requested by politicians with their consultation. The question isn’t, “Is this the correct investment return to project?” Rather, it’s, “Would it be reasonable of us to project this investment return?” The difference is critical.
Putting that aside, Magaziner ought to be hiding his face from the public for playing the “long-term investment card” because it’s so easy to call. But let’s play his game. Gregg reports that the calendar year return for the fund has been 0.88%, which should really be understood as a loss, meaning -6.62%. Well, what about last year? 2.2% (read, -5.3%). The last 10-year average? 6.0% (read, -1.5%).
The latest valuation report gives the annual returns for the last 21 years, back to 1995, and the average is 7.27% (-0.23%). That looks close, at least, but the green line on the chart at the bottom of this post (total value of the stock market) shows that 1995 happens to be the year investments took off into the stratosphere.
Start the clock at the turn of the century, and our 15-year average annual rate is 4.65% (-2.85%). In fact, if you define “long term” starting any year from 1995 through 2008, you’ll find that the compound annual growth rate is less than we need it to be. That encompasses the Bill Clinton stock market changes that shot the markets off like a rocket, including the dot-com bubble, the housing bubble that popped in 2007 (also attributable to Clinton, by the way), and the quantitative easing bubble that we’re now experiencing.
Rhode Island’s general treasurer shouldn’t be trying to lull us to sleep with promises that we can’t just look at one year… or two… or ten… or 15… or 20. He should be explaining what the state is going to do to make sure that it isn’t relying on a financial miracle.
That gets to Gregg’s question about reducing the investment return predictions, because the first step to solving a problem is acknowledging it honestly, but when it comes to government pensions, the alternative to hoping for miracles is addressing a calamity.