What I can't understand is that the stock market in the past 8 years has been one of the best in history. Wouldn't that make up for losses somewhat, and what would happen if the market tanked during that time?
Many pensions have ambitious assumptions of 7 or 8% annual returns.
S&P went from 1565 Oct 07 2007 to 735.09 Feb 27 2009.
We're now up to 2818 but if we had delivered 8% since october 07 we'd be at 3649 by this Oct 5. So we're 28% short!
If you use S&P peak in 2000 it's 1552 and to deliver 8% since then we'd need to be at 6209!!!
Catching back up to steady state growth, especially after a 50% loss, is unfathomably hard!
What makes it worse is that the present value of obligations skyrocketed as interest rates went to 0. In 07 the Fed Funds rate was 4.5% and it's currently 2%. This rate was 0.25% until the end of 2015. For a payout of $50k per year for 10 years, ten years in the future, the present value is $481,031 at 0.25%, $368,442 at 2%, and $254,761 at 4.5%.
So the current obligation is 44% higher than it was in 07 and the amount of money is 28% lower than expected. And this is AFTER the S&P has had an incredible run from 735 to 2818!
