One of the most important assumptions built into pensions is the guess at how much investments will grow over time. If investments provide high returns, then lawmakers don’t need to set aside as much money today to pay for pensions to be paid out in the future. If investments do not return as much as assumed, a gap develops between what has been promised and what has been saved. The bills cap the rate at which administrators can assume their investments will grow, allowing them to be no more risky than current policy allows. They also let administrators use less risky assumptions if they think it is prudent.
This is a smart approach. Much of the current pension debt exists because administrators overestimated investment returns. Taxpayers now owe more to the pensioners than they do to the lenders and bondholders who willingly lent the state money. Putting a cap on the assumptions administrators make can prevent future pension debt.
Author(s): James M. Hohman
Publication Date: 1 March 2021
Publication Site: Mackinac Center for Public Policy