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Every time I hear someone say it is fine to skimp on funding your retirement account because the market is up, I die a little inside. So it was a painful day for me when New York Mayor Zohran Mamdani announced last week that the city would balance its budget in part by contributing $2.3 billion less to its pension funds.
The justification of the move is that stock market returns are higher than the funds anticipated. And it is not just big-city politicians looking for an excuse to skimp. Treasury Secretary Scott Bessent recently speculated that one reason saving rates are down is that people’s 401(k)s are up.
Allow me to make a public service announcement: If you think the high returns in your stock portfolio mean you can cut back on your saving — think again. Let me explain the mechanics of investing in risky assets for the long run.
States and cities are obligated to pay pension benefits no matter what the state of the market. They calculate funding ratios based on the expected return from their investments. (This accounting method also kills me, because it doesn’t account for risk, but pension actuaries have their beliefs.) For years, New York City’s pension funds assumed an 8% return; the financial crisis and years of low interest rates demanded a reassessment, and in 2010 the funds reduced their assumption to 7%.
Continue reading the entire piece here at Bloomberg Opinion (paywall)
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Allison Schrager is a senior fellow at the Manhattan Institute and a contributing editor of City Journal.