Legendary investor Jack Bogle is apparently not all that optimistic that public pension funds in the U.S. are going to be able to meet their future funding obligations. Speaking with Bloomberg earlier today, Bogle predicted that bond returns will be a paltry 3% over the next decade, with stock returns not that much better, making it almost impossible for pensions to meet their arbitrary 7.5%-8.0% return hurdles.
The founder of Vanguard Group thinks a conservative portfolio of bonds will only return about 3 percent a year over the next decade, and stocks won’t do much better, with a 4 percent annual gain over a similar period. This is “totally defeating” for pensions, which “are not going to be able to meet their 7.5 percent or 8 percent obligations,” Bogle said in a Bloomberg Radio interview that aired Thursday.
“The only return you get on a bond is from the interest coupon,” with fluctuations in prices eventually evening out and becoming relatively negligible over the longer term, he said. Given a portfolio of about half corporate bonds and half U.S. Treasuries, the blended yield is about 3 percent today.
“So that’s what you get over the next decade,” he said.
“It is almost a given that it will end badly,” he said.
Of course, Bogle's sentiments on the imminent demise of public pension funds should come as no surprise for our readers as we've frequently warned that the arbitrary nature of pension accounting rules, primarily the ability to randomly pick discount rates out of thin air, has allowed managers to consistently understate liabilities for decades. Moreoever, as we pointed out in a post entitled "An Unsolvable Math Problem: Public Pensions Are Underfunded By As Much As $8 Trillion," the reason that the public pension ponzi has been allowed to persist by regulators for so long is quite clear...the truth is simply too scary.
We decided to take a look at what would happen if all federal, state and local pension plans decided to heed the advice of Mr. Gross. As one might suspect, the results are not pleasant. We conservatively assume that public pensions are currently $2.0 trillion underfunded ($4.5 trillion of assets for $6.5 trillion of liabilities) even though we've seen estimates that suggest $3.5 trillion or more might be more appropriate. We then adjusted the return on asset assumption down from the 7.5% used by most pensions to the 4.0% suggested by Mr. Gross and found that true public pension underfunding could be closer to $5.5 trillion, or over 2.5x more than current estimates. Others have suggested that returns should be closer to risk-free rates which would imply an even more draconian $8.4 trillion underfunding.
And while the sentiments expressed by Bogle should be a substantial overhang for the economy, no one seems to care for now. Certainly legislators have no incentive to address the issue... the country's 15 million union employees may not be so happy about supporting their political candidates if they knew their retirement plans were insolvent... much better to let the system break in 20 years then fix it with a massive taxpayer bailout after convincing the electorate that the problem was somehow created by top earners not paying "their fair share." After all, it's only $23,000 per man, woman and child.