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A Pension Math Problem for our Gubernatorial Candidates

Since we have a three day weekend, our potential gubernatorial candidates could spend some of their free time brushing up on pension mathematics.

The candidates might have to solve a simple word problem during a debate sometime. Here’s an example they can practice on:

At the end of the 2016 plan year, ABC State Employee Pension Fund has an accrued balance of $54 billion.

Of that accrued balance, $24 billion has not been deposited.

If ABC State Employee Pension Fund is required by law to allocate an annual investment return of 7.25% to each employee account within the fund for 2016, what rate of return must the existing investments actually earn during 2016 to meet the requirement?

a. 7.25%

b. 10.47%

c. 13.05%

d. The Multiplier

e. None of the above

f. All of the above

g. I skipped percentages during my Saxon Math class

If you are like me and disliked math word problems, you may deduce the answer by this method: Since the fund has a little more than half of the assets it is owed then the existing assets must earn almost double the interest rate required. A good guess would be c. 13.05%.

I post this math problem, not so much to joke about gubernatorial candidates trying to politicize an issue that they seemingly don’t understand, but as a reminder to my fellow members on the joint pension review committee. Both members and consultants worry over the plan earning 7.25% on average each year. Until a substantial portion of the $24 billion unfunded liability is deposited, the rate needed is a lot higher.

Happy Labor Day!

4 Comments

  1. Tony

    Please don’t raise taxes to pay a “substantial portion of the $24 billion unfunded liability”!!
    Of course I asked You not raise the gas tax, we know what You thought of that!

    • Tommy Stringer

      Tony, I didn’t like raising the gas tax either but if past legislatures had done what they should have done, we wouldn’t have needed it now. The same with this pension liability. I am not asking for a tax increase on the pension problem. I’m just letting people know because it is the kind of thing that politicians like to forget.

  2. Peter Thompson

    The average non-government worker out here works out heads off to keep up with living expenses. We are lucky if we work at a place that may match half of our contributions to a 401k plan. Even then the limit may only be no more than two or three percent of our pay.
    The average government worker earns twice that we do plus a cushy pension plan after 20 years. Do you think that we really want to pay more taxes to fund this foolishness? How about cutting some of these plans to match the funds you have. This no more unfunded pension plans. Magic

    • Tommy Stringer

      About 70% of the plan is owed to teachers. Part of their compensation is the pension plan. They pay contributions into the pension plan along with the schools as required under their contract. Each year they receive a statement of how much they have accumulated in retirement. Also, each year, the old 5 member budget and control board who served as trustees of the pension plan received a report showing the increasing unfunded liability. If this plan were the responsibility of a private corporation, it would be illegal to reduce the earned benefit of the participants in the plan. Furthermore, private pension plans cannot drop below an 80% funding threshold without the trustee being held responsible. That’s all federal law. Since this is a state plan, yes, there is the possibility that the legislature could just vote and say to the teachers and other state employees that they aren’t gong to get their retirement. Of course, there would be a lawsuit and I believe that the state employees would win. I have two points to make. First, I believe that it would be theft to take an earned benefit away from a participant in the state’s pension plan. It would be akin to Obama nationalizing 401(k) plans and dumping them into the Social Security Trust Fund. Second, I have never called for a tax increase to pay for this and I don’t intend to. I appreciate your comments.

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