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Megan McArdle

Why Would Anyone Follow Detroit's Pension Plan?

What kind of numerically illiterate pension trustees would issue "bonus checks" every time investment returns exceeded the target rate? The kind who oversee funds in San Diego, Philadelphia, Illinois and a host of other places.
Good for them, not so good for their successors.

Good for them, not so good for their successors.

Photographer: Alex Wong/Getty Images

All the way back in 2013, when I learned of Detroit's insane plan to issue "bonus checks" to retirees every time the pension system's investment returns exceeded the target rate, I was rendered speechless. Anyone with even a modicum of understanding of how investments work understands that the target return is the average return expected over a number of years. Some years will be higher, some years lower, but over time, these should average out. If you hand out the "excess" during the good years but don't dock checks during the years in which your funds underperform, you'll quickly drive your pension into insolvency. What kind of numerically illiterate trustees would allow this madness?

The kind who oversee funds in San Diego, Philadelphia, Illinois and a host of other places, according to Steve Malanga. What I had taken to be some sort of local aberration turns out to be astonishingly widespread. I'm not saying that this is a generalized problem with America's public pensions, but because I'm flabbergasted to find that the number of funds engaging in this unsound practice exceeds zero, multiple examples seems to call for gnashing of teeth and rending of garments.