Re:The Pension Hole for U.S. Cities and States Is the Size o...
by soVeryTired on Monday July 30, 2018 @07:17PM
(#17649083)
Pension holes mostly formed because interest rates dropped. Higher interest rates mean less money can be paid in to fund a pension today, since it will grow faster.
The critical error that pension providers made was to buy equities and 'alternative' investments instead of bonds. Had they bought bonds, their assets would have matched their liabilities. Instead, they assumed riskier investments would grow faster, effectively making pension promises cheaper.
Following the financial crisis, rates were cut aggressively, making bond prices and the present value of pension liabilities soar. IMO this is an under-appreciated facet of the financial crisis that's still waiting to bite us.
The critical error that pension providers made was to buy equities and 'alternative' investments instead of bonds. Had they bought bonds, their assets would have matched their liabilities. Instead, they assumed riskier investments would grow faster, effectively making pension promises cheaper.
Following the financial crisis, rates were cut aggressively, making bond prices and the present value of pension liabilities soar. IMO this is an under-appreciated facet of the financial crisis that's still waiting to bite us.