CalPERS cuts discount rate to 7 percent

Good Governance

| December 21, 2016

The nation’s largest public pension plan, CalPERS, just adopted a plan to reduce their 7.5 percent assumed rate of return to 7 percent over the next three years.

One board member described the rate reduction as “giving us a chance to be a leader in the nation in responsible pension funding.”

It is a move that the Public Employees’ Retirement System of Nevada (NVPERS) should seek to emulate.

At 8 percent, NVPERS assumed average annual investment return is one of the highest in the nation.

The use of inappropriate investment rates increases the likelihood that future generations will be burdened with the cost of past debt — much like what has already happened to current NVPERS members — while also exposing the fund to potential insolvency.

This is why over 100 countries require pension plans to use discount rates based on bond yields — similar to the approach required for U.S. private pension plans — which results in rates ranging from approximately 3.5 percent to 6 percent.

Even the pension plan at Warren Buffett’s Berkshire Hathaway only forecasts a 6.5 percent assumed rate of return on its investments.

In other words, NVPERS investments must outperform Warren Buffett in order to generate sufficient funds to make good on the promises made to retirees.

That’s one risky bet.

Robert Fellner is the director of transparency research at the Nevada Policy Research Institute.

For a more in-depth discussion of this topic, please click here.
To review all of NPRI’s analyses of the Nevada PERS situation, visit: http://www.npri.org/issues/detail/pers

Robert Fellner

Robert Fellner joined the Nevada Policy in December 2013. Robert has written extensively on the issue of transparency in government. He has also developed and directed Nevada Policy’s public-interest litigation strategy, which led to two landmark victories before the Nevada Supreme Court. The first resulted in a decision that expanded the public’s right to access government records, while the second led to expanded taxpayer standing for constitutional challenges in Nevada. An expert on government compensation and its impact on taxes, Robert has authored multiple studies on public pay and pensions. He has been published in Business Insider, Forbes.com, the Las Vegas Review-Journal, the Los Angeles Times, the Orange County Register, RealClearPolicy.com, the San Diego Union-Tribune, the Wall Street Journal, the Washington Examiner, ZeroHedge.com and elsewhere. Robert has lived in Las Vegas since 2005 when he moved to Nevada to become a professional poker player. Robert has had a remarkably successfully poker career including two top 10 World Series of Poker finishes and being ranked #1 in the world at 10/20 Pot-Limit Omaha cash games. Additionally, his economic analysis on the minimum wage won first place in a 2011 George Mason University essay contest. He also independently organized a successful grassroots media and fundraising effort for a 2012 presidential candidate, before joining the campaign in an official capacity.