It’s good to be loved.
Seen in the New York Times:
By firing its actuarial consultant last week, the New York State Legislature shone a light on one of the public sector’s deepest secrets: All across the country, states and local governments are promising benefits to public workers on the basis of numbers that make little economic sense.
The numbers are off-base for a variety of reasons. Sometimes there is a glaring conflict of interest, as there was in Albany, where the consultant was being paid by the workers seeking richer benefits. More often, there is subtle pressure on the actuary to come up with projections that make the pension fund look good.
Most of all, public pension actuaries use old methods that have fallen far out of sync with the economic mainstream. That does not necessarily mean their figures are wrong, but it does make them vulnerable to distortion, misunderstanding and abuse.[...]
The article provides a few examples, in which the Times, to its credit, does note that the actuaries involved opined in a manner that likely didn’t quite register with their audiences. For example, regarding New Jersey’s pension mess:
Two years later, a state senate committee called back the actuary, Robert D. Baus, for questioning, to make sure all was well. Senator Peter A. Inverso noted that a $4 billion deficit had appeared in the pension fund. “That frightens me,” he said. But Mr. Baus said that while the deficit had grown, “it does not change the fact that the system is funded.” He said New Jersey would have to close the shortfall at some point, but in the meantime, “it does not mean that there is not enough money to cover the liabilities right now. There is more than enough.”
No one asked exactly when the shortfall would have to be closed. Instead, legislators kept withholding pension contributions, even as they increased benefits again and again. Over the years the imbalances in the fund finally snowballed.
Now the fund is so deep in the red that Governor Jon S. Corzine’s administration cannot find the cash to catch back up. The Securities and Exchange Commission is investigating.
One other comment which caught my eye:
Actuaries worry their profession cannot withstand too many large lawsuits. The board that writes actuarial standards has been working on revisions in how to make economic assumptions.
But change is coming at a creep. There are still a large number of actuaries for public plans who vigorously defend current methods.
If you’d like to see a little discussion within the actuarial community about the article, you might be interested in this thread at the Actuarial Outpost.
I’m not a pension actuary, so I’m perhaps not the best person to comment on the specifics in that article.
However, I can note that as a profession, we actuaries are frequently lacking when it comes to communication skills (the NYT article has a “muted warnings” comment in one example). And, while we are comfortable with the language of risk and the concept of potentially widely varying outcomes, it’s all too easy to remember that our customers and the general public aren’t as well traveled in the land of randomness.
Mere non-actuarial mortals want a point estimate. A number. The One True Answer Fixed and Unchanging For Evermore™.
That’s a problem. An honest answer in our line of work is rarely just A Number. It’s a range of values, along with a discussion of what influences might impact where the outcome might be, and perhaps a few words around how to monitor the chaos to get a better indication of the final outcome as the situation evolves.
A lot of folks, sadly, aren’t equipped to handle that.
Thus, we have the real challenge of our profession — how to phrase our opinions in a way that educates our customers…or at least minimizes the potential harm from misuse of our opinions.
One thing’s for certain: the rule of thumb we were taught in the session of the CAS’s professionalism class I attended years ago — how would this look if it appeared on the front page of the New York Times? — seems very appropriate right about now.