The whole point of the Northwestern and Stanford studies is that the discount rate, which is used to determine the size of pension liabilities, should be divorced from the investment return assumption, as is the case with corporate pension plans. This is because how much one owes is independent of how much one expects to earn. CalPERS’s approach makes as much sense as suggesting you can reduce your mortgage balance simply by assuming you’ll get a raise next year.
On the other hand, the investment return assumption determines which generation pays for pension promises. Even though during the 20th century, investors with assets allocated like the typical pension fund had returns of 6 percent a year, CalPERS persists in using an investment return that’s 30 percent higher.
Unrealistic investment return assumptions are burglars’ tools, allowing one generation to create, hide and pass debts to future generations. What is the moral justification for utilizing assumptions that pile debts on kids?
– David Crane, Sacramento, special adviser to Gov. Arnold Schwarzenegger for jobs and economic growth