Wednesday, May 11, 2005

Pension Math

The major airlines got a get out of debt free card when a judge allowed United Airlines to shed responsibility for its employee pension plans. It seems only a matter of time until the private pension system collapses under the weight of failed plans.

One of the lessons to be learned from this is that many of the pensions that have failed did so because of overly optimistic assumptions about future returns on financial assets. This is rather remarkable given that stock and bond returns have been in a twenty-five year bull market. To be sure, companies elected overly optimistic assumptions partly to avoid putting appropriate reserves behind their responsibilities to their employees. Why pay the hired help when the alternative is higher compensation for owners and management?

But, as we watch what was thought to be a "sure thing" zap 40 million or so retirees and the taxpayers that may be called upon to bail them out, it seems a good time to remember the role of risk in projecting returns on financial assets. If the Fortune 500 was overly optimistic in projecting future returns on financial assets, why should 250 million Americans assume that George Bush would be more level headed in urging them to go for the "sure thing" of high returns on their private asset accounts?


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