Heard on the Street: America’s public pensions believe they can earn 7.4% per year. It’s a prediction that demonstrates the dangers of wishful thinking.
By Spencer Jakab July 26, 2019 5:30 am ET The hardest part about being a public pension manager is admitting you’re wrong.
Based on public funds’ historical experience, 7.4% might seem prudent. Their actual rolling 30 year returns through 2017 were almost 8.6%. Had one asked an investing expert three decades earlier if 8.6% was a realistic return for an investment portfolio, he or she probably would have agreed. At the end of 1987 a 30 year U.S. Treasury bond yielded about 8.9%. Meanwhile, the S&P 500 had returned 9.7% annually in the preceding three decades.
Unlike most Americans who decide only what their contributions are to retirement vehicles such as 401 plans and who may rely on wishful thinking when estimating how well or long they can live on that pot of money in the future, pension funds make that bet in reverse. Their obligations to beneficiaries are ironclad and in many cases constitutionally guaranteed, but what they happen to be on paper depends on projections they decide themselves.
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