Predicting the future on retirement systems | Arkansas Blog

Tuesday, October 25, 2011

Predicting the future on retirement systems

Posted By on Tue, Oct 25, 2011 at 9:30 AM

I was interested to read today that the Arkansas Teacher Retirement System will stick with an expectation of 8 percent annual return on investments in figuring soundness of the system.

Sounds pretty optimistic to me given the last decade, Check out this handy calculator of performance of the S&P 500 (stocks).

It shows the return for the 10 years ending Dec. 31, 2010 at a whopping .31 percent (that's less than 1 percent) compound annual growth rate. But reach back farther and things look better.

20 years — 8.5 percent
30 years — 11.39
40 years — 10
50 years — 9.56

Still, the trend for the last 30 years is downward. What's the new normal? Who knows? And these are just stock figures. Bond returns are a bit lower, 7.4 percent over 20 years according to the Barclays Index.

Of course, poor returns are offset somewhat in the short run by lack of inflation in salaries. No pay increases at all for some state employees the last two years. Certainly not 3.25 percent (the new, reduced assumption in the retirement system calculations, down from 4) plugged into the teacher formula yesterday.

Want a peek of the apocalypse? Check the cratering of California government finances, as reported by Michael Lewis in this month's Vanity Fair. The implosion of the city of Vallejo on account of overblown fire and police pension obligations (based on the dogged belief in 8 percent returns) is instructive, as are California prison costs, greater now annually than the amount spent in California on what was once the nation's premier system of higher education.

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