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Agreed. If I knew someone who was investing for retirement on the assumption of an 8.25% growth I'd be worried about them. The fact that a government agency did

by neaden 10y ago

Agreed. If I knew someone who was investing for retirement on the assumption of an 8.25% growth I'd be worried about them. The fact that a government agency did it is scary.

user5994461 10y ago
From what I recall, 8% returns might have been correct in 1999.
- n00b101 10y ago
  See above, the problem does not lie in the subjective question of whether or not 8% return is a reasonable assumption for an investor. The problem lies in how the actuarial liability was (mis)accounted for - specifically, the value of the guarantee was accounted by assigning it zero cost - which is completely incorrect. It is as if an incompetent real estate appraiser were to assign zero value the Golden Gate Bridge, and then your local politician legally transferred ownership of the bridge to some friends for free because the appraisal assigned zero value to the bridge. And then those friends started charging tolls on the bridge, and pocketing the money for themselves. That would normally be considered fraud or embezzlement.
n00b101 10y ago
This is a routine practice for actuaries. Here's an actuary from 2008 in New York's pension system calling his calculations "voodoo:" "In an interview on Thursday, Jonathan Schwartz, an actuary, called his job “a step above voodoo” and conceded he skewed his work to favor unions. He also admitted to erroneously claiming that a controversial early retirement bill, backed by District Council 37, would have no cost, explaining, “I got a little bit carried away in my formulation.” [1] Again, my point is not just that 8.25% growth is a very optimistic assumption. My point is that we you guarantee a rate of return on investment, then you need to calculate the value of the guarantee explicitly, and the established formulas [2] for calculating the value of such guarantees do not require any assumptions about future growth rates - you are supposed to just use the "risk-neutral rate" rate, which is like the yield on US government bond. An example of the guarantee that I'm talking is this (from the article): "Highway Patrol officers could retire at 50 and receive as much as 90% of their peak pay for as long as they lived" ... So the pensioners are guaranteed to receive X% of their peak pay, regardless of what the actual rate of return turns out to be on the pension investments. This is equivalent to a put option, and the valuation methodology that the Chief Actuary used for this (according the article) is inexcusable - but not surprising. [1] http://cityroom.blogs.nytimes.com/2008/05/16/speaker-tosses-work-of-voodoo-actuary/ http://cityroom.blogs.nytimes.com/2008/05/16/speaker-tosses-... [2] https://en.wikipedia.org/wiki/Black%E2%80%93Scholes_model https://en.wikipedia.org/wiki/Black%E2%80%93Scholes_model

by neaden 10y ago

Agreed. If I knew someone who was investing for retirement on the assumption of an 8.25% growth I'd be worried about them. The fact that a government agency did it is scary.

user5994461 10y ago

From what I recall, 8% returns might have been correct in 1999.

n00b101 10y ago
See above, the problem does not lie in the subjective question of whether or not 8% return is a reasonable assumption for an investor. The problem lies in how the actuarial liability was (mis)accounted for - specifically, the value of the guarantee was accounted by assigning it zero cost - which is completely incorrect. It is as if an incompetent real estate appraiser were to assign zero value the Golden Gate Bridge, and then your local politician legally transferred ownership of the bridge to some friends for free because the appraisal assigned zero value to the bridge. And then those friends started charging tolls on the bridge, and pocketing the money for themselves. That would normally be considered fraud or embezzlement.

n00b101 10y ago

This is a routine practice for actuaries. Here's an actuary from 2008 in New York's pension system calling his calculations "voodoo:" "In an interview on Thursday, Jonathan Schwartz, an actuary, called his job “a step above voodoo” and conceded he skewed his work to favor unions. He also admitted to erroneously claiming that a controversial early retirement bill, backed by District Council 37, would have no cost, explaining, “I got a little bit carried away in my formulation.” [1] Again, my point is not just that 8.25% growth is a very optimistic assumption. My point is that we you guarantee a rate of return on investment, then you need to calculate the value of the guarantee explicitly, and the established formulas [2] for calculating the value of such guarantees do not require any assumptions about future growth rates - you are supposed to just use the "risk-neutral rate" rate, which is like the yield on US government bond. An example of the guarantee that I'm talking is this (from the article): "Highway Patrol officers could retire at 50 and receive as much as 90% of their peak pay for as long as they lived" ... So the pensioners are guaranteed to receive X% of their peak pay, regardless of what the actual rate of return turns out to be on the pension investments. This is equivalent to a put option, and the valuation methodology that the Chief Actuary used for this (according the article) is inexcusable - but not surprising. [1] http://cityroom.blogs.nytimes.com/2008/05/16/speaker-tosses-work-of-voodoo-actuary/ http://cityroom.blogs.nytimes.com/2008/05/16/speaker-tosses-... [2] https://en.wikipedia.org/wiki/Black%E2%80%93Scholes_model https://en.wikipedia.org/wiki/Black%E2%80%93Scholes_model