“…the current [pension] shortfall is attributable to the recent stock market plunge…”
Hmm…first of all, the S&P 500 has doubled from its March 2009 low and is now within 40 points of its all time high (1,565 on Oct. 9, 2007). So we are past the plunge.
Second, the problem of poor returns now stretches back over a decade:
The NASDAQ index peaked at 5132.52 on March 10, 2000. Yesterday (February 28, 2011), nearly 11 years later, it closed at 2782.27, down 45.8%.
The S&P 500 closed at 1,527.46 on March 24, 2000. Yesterday it closed at 1,322.75, down 13.4% over almost 11 years.
The Dow Jones industrial average closed at 11,722.98 on January 14, 2000. Yesterday (Feb 28) it closed at 12,226.34, up 4.3% in 11+ yrs.
Those figures do not include dividends – trivial in the case of NASDAQ, 1-2% for the S&P, 2-3% for the DJIA – but on the other hand, they do not take inflation into account either, and inflation over the last 11 years has averaged well over the rate of dividend returns. Thus the real return on US equities is even less than the figures suggest.
Throughout the last decade the assumed pension return has been 8%. Fortunately some of the pension fund was invested in bonds, which did much better than stocks – but still not 8%.
More generally, there have been multiple 10 and even 25 year periods when nominal stock market returns have amounted to zero (e.g. from 1909 to 1919 the Dow made no net advance; the 1929 peak wasn’t recovered until 1954; and the 1972 high wasn’t surpassed until 1983 – again, no adjustments for inflation).
However, when the good times come – and the 1981-2000 period was among the best – there is an irresistible tendency to think those returns are going to last forever, and to reset pension benefits accordingly.
It is possible that we are now in the midst of a 15-20 year bear market during which consumers, businesses and government at all levels will be deleveraging from the excessive debt taken on in the previous 3 decades. If that turns out to be the case then the assumed return on pension assets should be no higher than the available return on safe long term assets like treasuries (i.e. about 4.5%).