More Pension Math

CA pension funds didn’t “lose money” in the Great Recession

Let’s say you purchased a S&P500 Index Fund on Sep 19, 2003 at $1,036:

By 2007 your asset was valued at $1,562:

Then that asset value declined to $683 during the Great Recession:

Then came a nine year bull market and you sold your asset on March 16 2018 for $2,752, realizing a gain of $1,716:

Did you “lose money” during the Great Recession? Of course not. You didn’t sell your investment at that time. The only organizations that lost money during the Great Recession were those that sold assets then, either because they were forced to do so to meet debt or other obligations or they panicked. As millions of California homeowners who went through the Great Recession know, a homeowner did not lose money at that time unless he or she was forced to sell at that time. Likewise for California’s pension funds. They weren’t forced to sell assets then and as professional investors know not to panic when markets dive. Indeed, they remind audiences they are long-term investors that as professionals take advantage of fluctuating markets.

Please consider this example next time anyone suggests — incorrectly — that the Great Recession is a cause of exploding pension costs in California today. The real reason for that explosion is explained here. An unfunded liability would’ve developed even without a Great Recession, as explained here. Other pension plans that went through the same recession didn’t have explosions in unfunded liabilities for reasons explained here.

Few areas of state and local government have a greater impact on public services than pensions and other forms of deferred employee compensation yet fewer areas are more poorly understood. The Ravitch Fiscal Reporting Program at the City University of New York is helping journalists to learn more about those subjects.