The Wrong-Way Pension Fund


It’s nearly February 2016; do you know where your state’s pension fund is?

Rhode Island’s pension system investments lost money in 2015, the first year-over-year decline for the retirement fund since the 2008 financial crisis, the State Investment Commission reported Wednesday.

The $7.5-billion pension fund posted a 0.28 percent loss, shrinking by $436 million from December, 2014, as global equity markets slumped after several strong years. In 2014 the pension fund’s value rose 4.9 percent and in 2013 it rose 14.1 percent. During the throes of the financial crisis, the fund lost 26.2 percent in 2008.

The silver lining of Patrick Anderson’s Providence Journal article, though, is that the idea of lowering the pension fund’s discount rate — in other words, of admitting that it’s just not going to average a 7.5% annual investment return in the long term — is becoming a mainstream question.  In challenging Democrat General Treasurer Seth Magaziner, Anderson makes a telling point (emphasis added):

Even after a rough 2015, Magaziner said there are no imminent plans to reevaluate the pension system’s 7.5 percent assumed annual rate of return. Reducing the expected investment returns would require larger contributions from the state and municipalities.

“The assumed rate of return should not be adjusted frequently in response to short-term market movements,” Magaziner said after the meeting. “We’ll look at it and make a change if we need to, but I want to get people out of the short-term mindset where they say: ‘the market is up, why don’t we go higher, or, the market is low, why don’t we go lower.'”

This is a classic example of government’s dealing with politically difficult problems by simply hiding them.  As Anderson goes on to point out, there pretty much is no long term measure by which the state is actually achieving the returns that it needs to achieve.  The real difficulty is that doing the right thing when it comes to management would require an admission that the state’s pension system is much more expensive than the state can afford.  So, the solution is to play let’s pretend as the problem gets worse and worse.

On a related note, by the way, I’ve submitted a complaint to the attorney general’s office against the treasurer and retirement system, who refuse to give me the estimate for all pension benefits promised without the discount.  The wheels are definitely in motion, so I’ll keep readers posted.

  • Max

    Did I miss where he said they’d also have to raise state and municipal employee contributions? By all appearances, Magaziner is already trying to make up the losses on the backs of municipalities by denying disability pensions which forces the municipality to pay full salary and benefits to stay home. A not-so-long-ago media segment was just the tip of the iceberg.

  • Raymond Carter

    The state system is sustainable for the medium term due to the effective end of COLA’s. It’s the municipal systems that will collapse first.
    Tommy Cranston