The Sun Never Sets On An Optimist


CalPensions.com' Ed Mendel finds a late-20th century prediction about the massive California Public Employees Retirement System (CalPERS) that turned out to be right. Needless to say, the prediction was a worst-case scenario:

The actuaries said the annual state payment to CalPERS, $159 million in 1999, could soar to $3.954 billion in fiscal 2010-11 — a long-range forecast that scored a near bull's-eye on the $3.888 billion state payment for the fiscal year that began this month.

The investment shortfall was one of several outcomes the fund considered at the time:

If investments hit the earnings target assumed by CalPERS, an annual average of 8.25 percent (since lowered to 7.75 percent and now under review), the state payment this fiscal year would be $679 million.

But if earnings during the decade averaged 4.4 percent, a repeat of the decade from 1966 to 1975, the state payment would be $3.954 billion. If earnings averaged 12.1 percent, a repeat of 1947 to 1956, the payment would be zero…

As it turned out, a scenario based on a 4.4 percent average return was not "down" enough. CalPERS earnings during the last decade averaged 3.1 percent, according to a Wilshire consultants report in March.

If the actual return came in even lower than the lowest-return scenario, shouldn't that make the taxpayer-funded shortfall even larger than CalPERS' actuaries predicted?

Note that the Golden State's public employee pension fund managers continue to forecast magical rates of return. The chief investment officer for the California State Teachers' Retirement System (CalSTRS) says cautious investment outlooks are unpatriotic:

Asked for a breakdown of the assumed 8 percent earnings rate, Chris Ailman, the CalSTRS chief investment officer, said 3 percent is inflation and 5 percent is real growth, reduced further by the nearly 2 percent usually received from stock dividends.

"I would argue, and I have, with people who said it's going to be 6 (percent) or lower that they are basically saying the United States is going to go in the drain in the next 100 years," said Ailman. "I'm not willing to go there.

As Gov. Schwarzenegger's economic advisor David Crane notes here, 6 percent is about the rate of return investment funds got over time during the vastly prosperous 20th century. There used to be (back before the nineties became The Nineties) a rule of thumb: Anybody who promises you more than a 7 percent return per year is not just being unduly optimistic but actively blowing smoke up your anal canal. That's the kind of thing people believed in the industrial age, but this is a time of magic.