True costs? There is no risk-free rate
By Pensions & Investments | August 6, 2012
It was not surprising that there was a rebuttal to the July 9 Other Views piece, “Moves to DC really about cutting retirees' benefits.” The disappointing aspect of the rebuttal (Other Views, “Better decisions by adding up true pension costs,” July 23) was the attempt to divert attention from the fundamentals.
To keep it simple:
There is no risk-free rate. Anyone who believes there is has no grasp of the risks to which public-sector employers and taxpayers are exposed.
Even if there were a risk-free rate, would it be appropriate to apply it to benefits that are not guaranteed? The reason for this question is an even bigger picture question — if the present value of future benefits to present active and retired employees can be reduced by law changes that are upheld by the courts, are the benefits guaranteed? I'm not expecting critics of public-sector defined benefit plans to acknowledge this reality, because it guts the argument for use of the mythical risk-free rate.
As a final point, Mark Twain said, “It ain't what you don't know that gets you in trouble — it's what you know for sure that just ain't true.” With increasing frequency, critics of public-sector defined benefit plans throw out the word “true” to describe their opinions, such as in “true cost” or “true liability.” Mark Twain was not buying it in his time — there is no reason for us to buy it in ours.
Executive Director, Missouri State
Employees' Retirement System
Mandatory plans inevitable
I thought your editorial was great, although I do like Australia's mandatory pension system (“A mandate for pensions?,” Pensions & Investments, July 9).
Americans are just not saving enough, and mandates or an expansion of Social Security seem inevitable.
Jonathan Barry Forman
Alfred P. Murrah Professor
University of Oklahoma College of Law
This article originally appeared in the August 6, 2012 print issue as, "True costs? There is no risk-free rate".