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January 2012 Policy Study, Number 12-1

   

Iowa's Privileged Class: Time for a Change!

    The Stock Market: a Key Factor
   

DB pension plans operate on the presumption of both additional incoming funds and growth in currently held and invested funds.


If either funding stream is significantly reduced, the ability of the plan to pay promised benefits might be compromised. One major impact of the 2008 recession was the drop in the stock market. This affected state-controlled pension funds as well as individual private-sector IRAs. In FY 2009 the median drop of a state pension fund was 19.1 percent.[25]


Part of the discussion concerning DB pension funds is the anticipated return rate used to figure the growth in assets. Many states use 8 percent as their assumed average annual return. Historically, this was probably a good figure, as the median return from 1984 to 2009 was 9.3 percent. For the period 1990 to 2009 the median was 8.1 percent – lower but still beating the baseline.


However, from 2000 to 2009 or basically the last ten years the median return was only 3.9 percent.[26] The lower the return is – without a corresponding adjustment to the required pension pay outs – the larger the long-term liability and the more money the taxpayers are potentially expected to add to the funds.

 

Some experts have recommended using an expected return rate ranging from 5.22 percent, the private-sector standard, to 4.38 percent, the return rate on a 30-year Treasury bond.[27]


Using these figures, which may be more realistic going forward, will result in significant increases in the amount of unfunded liabilities. And correspondingly, significant increases in state budgets and state contributions to make up the difference.

 

   

 

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