July 12, 2012

MORE ON THOSE UNDERFUNDED / OVERGENEROUS PUBLIC PENSIONS: Moody’s Triples Pension Debt Estimates.

As we follow the evolving story of collapsing public pensions, one of the trickiest issues is the lack of reliable estimates of future returns on investment. Many of the biggest offenders among pensions assume returns of 8 percent or higher. These numbers may seem reasonable by historical standards, but they’re hopelessly optimistic today. Even plans that have revised their estimates downward still project returns far above what most analysts expect. If these estimates don’t come through, taxpayers will be left holding the bag, and either pension payouts will have to shrink or other services, including education and law enforcement, will have to.

Unions have long claimed that these worries are mere alarmism, but now Wall Street is stepping in to say it, too: pension investment projections are far too high. A new estimate from Moody’s anticipates average pension returns of 5.5 percent rather than the traditional 7 or 8 percent investment projection. The result of this estimate is a tripling of national pension debt, from $766 billion to $2.2 trillion. This is a major increase, but many analysts believe that it is accurate, or at least more accurate than previous estimates.

Something that can’t go on forever, won’t. Debts and obligations that can’t be paid, won’t be.

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