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Why Do We Use A 30-Year Time Horizon?
[A conversation between NCPERS executive director and counsel, Hank H. Kim, and NCPERS director of research, Michael Kahn, Ph.D. about NCPERS new research, Enhancing Sustainability of Public Pensions].
Why Do We Use A 30-Year Time Horizon?
[A conversation between NCPERS executive director and counsel, Hank H. Kim, and NCPERS director of research, Michael Kahn, Ph.D. about NCPERS new research, Enhancing Sustainability of Public Pensions].
NCPERS Executive Director, Hank H. Kim: Why do you use a 30-year time horizon and personal income instead of GDP as a measure of economic capacity in Sustainability Valuation?
NCPERS Director of Research, Michael Kahn, Ph.D.: The pension funds have 30-year time horizon based on the amortization period that most pension funds use. Although it's true that some pension funds have reduced their amortization period, but our analysis is based on state-by-state basis. So, we don't have that kind of individual pension plan information, so we use 30-year amortization period. We should also use then the 30 years economy based on this 30-year. It will be comparing apples-to-apples, if we do that. But if currently most people usually do is take 30 years of unfunded liabilities, compare them with one-year economy or one-year revenue. Which is very misleading and resulting in decisions that are very harmful to everybody in the economy- to the pension fund, to the beneficiaries. That's why we use a 30-year period and this is just like you know you buy a mortgage. They don't consider one-year income to pay off the mortgage. You have 30 years to pay. Even banks don't use one-year income to give you a 30-year mortgage. They have different formulas. For example, 20% down and your monthly payment mortgage payment should be no more than one-fourth of your monthly income. It doesn't make sense to compare 30-year unfunded liabilities with one-year revenues or one-year personal income as a measure of economy.
In the coming weeks, NCPERS will release videos between Kim and Kahn discussing different aspects of Enhancing Sustainability of Public Pensions. You can view our previous videos: What Is The Difference Between Sustainability Valuation & Actuarial Valuation?; Sustainability Valuation And Actuarial Valuation; How Can We Enhance Sustainability Of Public Pensions? What Do We Mean By Sustainability Valuation?.
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