Low interest rates are a tax on people who save money. And they are a subsidy for the big banks. They are just one more Wall Street bailout.
Holding interest rates as low as they are causes hardship for many. It makes savers look for higher returns. Retired people who were lucky enough to put money away can’t afford to get by. It causes people to take risks like putting money in the stock market, where it can be lost. It makes people susceptible to scams.
But the consequences can be a lot worse than that. Read this: Public Pensions Are Adding Risk to Raise Returns
But states and other bodies of government are seeking higher returns for their pension funds, to make up for ground lost in the last couple of years and to pay all the benefits promised to present and future retirees. Higher returns come with more risk.
“In effect, they’re going to Las Vegas,” said Frederick E. Rowe, a Dallas investor and the former chairman of the Texas Pension Review Board, which oversees public plans in that state. “Double up to catch up.”
. . . Most have been assuming their investments will pay 8 percent a year on average, over the long term. This is based on an assumption that stocks will pay 9.5 percent on average, and bonds will pay about 5.75 percent, in roughly a 60-40 mix.
They assume 8%? Who is kidding who? Everybody knows this is not realistic, but they are allowed to keep the assumption on the books.
“Nobody wants to adjust the rate, because liabilities would explode,” said Trent May, chief investment officer of Wyoming’s state pension fund.
This is the same thing as allowing banks to not “mark to market” their mortgage portfolios. Everyone knows the banks are insolvent, but they are allowed to keep from writing down these toxic assets. Or the government buys them up from the ones with political influence…
Just HOW bad is the problem?
Colorado has been assuming its investments will earn 8.5 percent annually, on average, and on that basis it reported a $17.9 billion shortfall in its most recent annual report.
But the state also disclosed what would happen if it lowered its investment assumption just half a percentage point, to 8 percent. … the plan’s shortfall would actually jump to $21.4 billion.
So they are reporting a $17.9 billion shortfall if the assumption is a fantasy 8.5% return. If they lower that to a still-fantasy 8% assumption they would have to report a $21.4 billion shortfall.
So just how bad would it be if they reported an honest assumption?
We are not out of the financial crisis until all of the accounts are honest and transparent.