Recommended: The Pension Rate-of-Return Fantasy

In the Wall Street Post today Andy Kessler has an interesting piece, The Pension Rate-of-Return Fantasy.  As he points out, all sorts of local and state governments, and not a few big corporations,  have based their pension calculations on wildly over-optimistic estimates of the rate of return of their pension investments in the coming years.  So even pension systems that look, on paper, to be healthy may well be simply illusions.

In general, governments and corporations have predicted returns on their pension investments in the range of 7-9% per year. The actual rate of return in recent years has been more like 2-3%.  For my own retirement accounts spreadsheet, I have been assuming real returns, conservatively, at about 1%  per year after allowing for 4% annual inflation.  While inflation thus far hasn't actually been that high (about 2.4% per year on average over the past 10 years), the fact that the Fed continues to print money by the billions makes me wonder if my 4% average inflation estimate isn't itself overly-optimistic over the long term.

Of course the stock market has in the past month or so seen new highs, but one can't help but wonder if this isn't really just another short-term bubble fueled by the Fed's rock-bottom interest rates. Yes, the economy is improving, but at a very, very sluggish pace, hardly fast enough to justify the "irrational exuberance" of the stock market in recent days.

In any case, this is yet another sign that, below the surface, we have serious fiscal problems in this nation which the political system, and the public, are largely ignoring, perhaps hoping they will just somehow magically go away. We would no doubt be in far worse shape if Europe weren't in such bad shape that Treasury bonds still look like the best and safest investment around, despite our national debt load and federal deficits.  But then, European politicians have been so amazingly inept at handling their fiscal problems over the past few years that perhaps this fortunate (for us) condition will prevail for many more years.