American state and local pensions have less than 73% of the assets they need to fund future obligations to public workers, according to a survey of 180 plans by Boston College’s Center for Retirement Research. They believe they can help keep that gap from widening by earning an average of 7.4% annually.

The surveyors “take plans at their word” when it comes to these investment assumptions, says CRR’s Director of State and Local Research Jean-Pierre Aubry. Maybe we shouldn’t.[…]

A 30 year Treasury bond today yields less than 2.6%. Meanwhile, the cyclically-adjusted price-to-earnings ratio (CAPE) compiled by Nobel laureate Robert Shiller, which a Vanguard Group study found had the best ability to predict medium-term stock returns, is above 30 today. It was at just 16 back at the end of 1987.

When the CAPE has been above 25 then subsequent S&P 500 10-year returns have averaged just 4.1% over the ensuing decade based on data going back to 1928. A portfolio 70% invested in stocks and 30% in high-quality corporate bonds today might therefore be expected to return about 3.8% over 10 years. It could be higher, but even the best historical result would fall short of pension funds’ forecasts.

Read the whole article at The Wall Street Journal.


This article quotes selections from “America’s Public Pensions Are Stuck In The Clouds,” by Spencer Jakab, in The Wall Street Journal, July 26, 2019.