“It’s the Wild West Out There”

RSI Releases Pension Q&A With Rockefeller Institute’s Donald Boyd

 

SAN JOSE, Calif., Oct.13, 2016 — The Retirement Security Initiative (RSI) today announced a new series of pension analysis from the country’s leading policy and fiscal thought leaders. To kick off the series, financial expert Donald Boyd, director of Fiscal Studies at the Rockefeller Institute of Government, shared his assessment of the growing pension funding crisis in an interview with RSI.

Underfunded pension systems are one of the biggest challenges facing state and local budgets, resulting in an estimated $1 trillion to $5 trillion in total U.S. pension debt. RSI’s new series will examine how the U.S arrived in this predicament and what steps can be taken going forward to ease the overwhelming financial burden on governments.

The just-released interview with Boyd examines investment risks being taken by pension funds and their potential consequences, as well as the flawed institutions that helped lead to this situation. It concludes with possible policy changes that would make it more difficult to wind up in this situation again.

"A typical 75 percent funded pension fund runs about a one in six chance of falling below 40 percent in the next 30 years,” says Boyd in the interview. “Portfolios are risky enough that even with full payment of contributions, bad returns could drive funding this low. This is a crisis level.”

Although some de-risking is occurring, Boyd doesn’t expect a big shift. "Incentives in the system encourage risk taking, and there are no rules to counter those incentives - it’s the Wild West out there,” he says. “There are virtually no rules - no police – for public pensions.”

To tame the ‘Wild West,’ rules and other institutions will be needed, says Boyd. For example, liabilities and annual costs in government and pension plan financial statements should be measured with discount rates that reflect the characteristics of the liability; discount rates used to determine contributions should be based on market interest rates rather than a plan’s portfolio; and plans and governments should clearly disclose information, along with measures of risk, in comprehensive annual financial reports and in municipal bond disclosures.

To read more of Boyd’s interview, click here.

 

 

About RSI:

The Retirement Security Initiative (RSI) is an advocacy organization focused on protecting and ensuring the fairness and sustainability of public sector retirement plans. RSI marshals and organizes a broad range of resources to help policymakers learn about pension issues and explore policy options. Learn more at www.RSINow.org.

 

About the Rockefeller Institute:

The Nelson A. Rockefeller Institute of Government is the public policy research arm of the State University of New York. The Institute conducts fiscal and programmatic research on American state and local governments. Journalists can find useful information on the Newsroom page of the Web site, www.rockinst.org.

 

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