Mass. needs more realistic goal for pension fund returns

Boston Globe Editorial, June 24, 2012

In some ways, lowering expectations for returns on the state’s pension fund investments is an easy call. Current state law requires the Massachusetts pension board to assume an 8.25 percent annualized rate of return, but in recent years that has come to seem too optimistic. Massachusetts needs to start stepping its pension expectations down — but in a deliberate way, to limit the impact on government agencies that will need to contribute more.

State Treasurer Steve Grossman is now asking lawmakers to trim the target to 8 percent, the number used by many public pensions in the country. This is a reasonable first step. Setting too high a target lets policymakers off the hook; in effect, they can promise public workers benefits funded with money that probably won’t materialize. A more cautious target reduces the risk that future taxpapers will be left with the tab for today’s pension promises.

Massachusetts’s pension funds have averaged a nearly 9.6 percent annual return since 1986. Public plans across the country have averaged an 8.5 percent return over a similar period. Yet returns in the most recent decade have been tepid, and states that aim too high often end up making riskier investments in the hope of hitting their target.

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