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> I think 7% nominal over a long period (such as a pension fund could expect) is quite reasonable and would expect a pension so funded to be quite stable. Pens

> I think 7% nominal over a long period (such as a pension fund could expect) is quite reasonable and would expect a pension so funded to be quite stable. Pension funds aren't retirement accounts; you don't care about a total 30-year return, you care about ongoing cash flow, and if you have fixed obligations in a bad year then you eat into principal. This obviously creates problems down the road, especially when you have decreased contributions over time due to a shrinking population in the municipality in question -- or a shrinking tax base (e.g., the downward spiral of rich people leaving because they don't like tax hikes, which results in tax hikes to cover the revenue shortfall....repeat). Also, they're usually diverse portfolios with a fair amount of lower-risk/lower-return assets (mostly T-bills and investment grade F500 debt), so 7% is actually pretty ambitious.

sokoloff 9y ago
As a permanent pension fund (rather than an individual retirement account), the fund has the advantage of a timeline of "forever" with a greater portion of assets than a 401K could. This allows them to hold a smaller percentage of cash/cash equivalents. To your excellent point about shrinking base making things fall apart, this is only a problem for underfunded pensions and Ponzi schemes. I leave it to the reader to determine whether those are two different things or not.
- leroy_masochist 9y ago
  Right -- the problem is underfunding, but the driver of the underfunding of public pensions isn't just that nobody can predict the future; it's that politicians and union leaders both have morally hazardous incentives to agree to something that both parties know might not hold up in the future, because they (the individual politician and the union leader, specifically) will have moved on from their current roles by the time the wheels fall off in a couple decades. I'm not sure I understand your point about cash and cash equivalents....securities are fungible to cash....the issue is that there's a defined payout every year in $USD, and if the contributions to the fund from which it were paid were modeled in an overly optimistic way, then the fund runs out of money.
  - sokoloff 9y ago
    > your point about cash and cash equivalents. Individuals need to hold a certain amount of their 401K/IRA in cash to pay expenses, to prevent having to sell a lot of stock in a bear market. Individuals will not have the time to recover from a sharp bear market just as they begin retirement. This causes them to miss out on the higher upside in normal and bull markets. (see "sequence risk") Permanent funds, adequately funded, could leave a greater percentage of their money in equities, which has (historically had) higher overall returns despite larger short-term drawdowns.
    - leroy_masochist 9y ago
      > Permanent funds, adequately funded, could leave a greater percentage of their money in equities, which has (historically had) higher overall returns despite larger short-term drawdowns. Agree, but they don't. Every pension portfolio I've seen has a lot of fixed income in it.
      - sokoloff 9y ago
        How many of those pension funds are adequately funded? (defined as "could pay out the already earned benefits for all current benefit holders without any future cash infusion") I think you see them holding fixed income and cash equivalents because they need current cash and future cash deposits. (They're pretty damn close to Ponzi schemes in a lot of cases.)

sokoloff 9y ago

As a permanent pension fund (rather than an individual retirement account), the fund has the advantage of a timeline of "forever" with a greater portion of assets than a 401K could. This allows them to hold a smaller percentage of cash/cash equivalents. To your excellent point about shrinking base making things fall apart, this is only a problem for underfunded pensions and Ponzi schemes. I leave it to the reader to determine whether those are two different things or not.

leroy_masochist 9y ago
Right -- the problem is underfunding, but the driver of the underfunding of public pensions isn't just that nobody can predict the future; it's that politicians and union leaders both have morally hazardous incentives to agree to something that both parties know might not hold up in the future, because they (the individual politician and the union leader, specifically) will have moved on from their current roles by the time the wheels fall off in a couple decades. I'm not sure I understand your point about cash and cash equivalents....securities are fungible to cash....the issue is that there's a defined payout every year in $USD, and if the contributions to the fund from which it were paid were modeled in an overly optimistic way, then the fund runs out of money.
- sokoloff 9y ago
  > your point about cash and cash equivalents. Individuals need to hold a certain amount of their 401K/IRA in cash to pay expenses, to prevent having to sell a lot of stock in a bear market. Individuals will not have the time to recover from a sharp bear market just as they begin retirement. This causes them to miss out on the higher upside in normal and bull markets. (see "sequence risk") Permanent funds, adequately funded, could leave a greater percentage of their money in equities, which has (historically had) higher overall returns despite larger short-term drawdowns.
  - leroy_masochist 9y ago
    > Permanent funds, adequately funded, could leave a greater percentage of their money in equities, which has (historically had) higher overall returns despite larger short-term drawdowns. Agree, but they don't. Every pension portfolio I've seen has a lot of fixed income in it.
    - sokoloff 9y ago
      How many of those pension funds are adequately funded? (defined as "could pay out the already earned benefits for all current benefit holders without any future cash infusion") I think you see them holding fixed income and cash equivalents because they need current cash and future cash deposits. (They're pretty damn close to Ponzi schemes in a lot of cases.)