Pension Computations
Pension computations are often performed by actuaries using assumptions regarding current and future demographics, life expectancy, investment returns, levels of contributions or taxation, and payouts to beneficiaries, among other variables. One area of contention relates to the expected investment return rate. If this rate (expressed as a percentage) is increased, relatively lower contributions are demanded of those paying into the system. Critics have argued that investment return percentage rate assumptions are artificially inflated, to reduce the required contribution amounts by individuals and governments paying into the pension system. For example, the U.S. stock market (adjusted for inflation) did not have a sustained increase in value between 2000 and 2010. However, many pensions have annual investment return assumptions or estimates in the 7-8% range, which are closer to the pre-2000 average return. If these rates were lowered 1-2 percentage points, the required pension contributions taken from salaries or via taxation would increase dramatically. By one estimate, each 1 point reduction means 10% more in contributions. For example, if a pension program reduced its investment return rate assumption from 8% to 7%, a person contributing $100 per month to their pension would be required to contribute $110. Attempting to sustain better-than-market returns can also cause portfolio managers to take on more risk.
The International Monetary Fund reported in April 2012 that developed countries may be underestimating the impact of longevity on their public and private pension calculations. The IMF estimated that if individuals live three years longer than expected, the incremental costs could approach 50% of 2010 GDP in advanced economies and 25% in emerging economies. In the U.S., this would represent a 9% increase in pension obligations. The IMF recommendations included raising the retirement age commensurate with life expectancy.
Read more about this topic: Pensions Crisis
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