Given that the 10-year Treasury Bond currently pays just over 1.5% and many pension funds use the “60% fixed income and 40% stocks etc.” basic portfolio model, and it doesn’t take much to realize that a 7-8% annual investment return is wishful thinking and actuarial studies have shown that the average is actually closer to half or about 3.5%. Along comes CALPERS latest annual report showing that it earned just .6% last year less than a tenth of its 7.5% assumed rate of return. In fact, the funds history of underperformance has now pushed long term return averages going back 25-years below the 7.5% assumed rate of return. All things being equal this means that the funds level of underfunding has grown steadily meaning that its ability to pay pension benefits is degrading. Not to pick on CALPERS as these experiences are in fact quite common among pension funds.
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