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Old 07-14-2018, 07:40 AM
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Mary Pat Campbell
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Default Jeremy Gold's Greatest Hits

This thread is in memory of Jeremy Gold, and to compile some of his notable work/comments.

I'll link to AO posts/threads, but also other stuff.

First, this was his own site, with his papers:
http://users.erols.com/jeremygold/papers.html

I just noticed some of the links to his articles on the page don't work, so I'll dig them up again.

Here is a classic paper:
http://www.pensionfinance.org/papers...oldmerrill.pdf
Fair Value of Liabilities: The Financial Economics Perspective
by David F. Babbel, Jeremy Gold, and Craig B. Merrill
NAAJ, vol 6, no 1
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Old 07-14-2018, 07:46 AM
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Next a video of Jeremy giving a presentation at MIT in 2015:
https://www.youtube.com/watch?v=D-olXJUXe90

slides are here:
http://cfpevents.mit.edu/wp-content/.../07/mit-12.pdf

Some quotes from the presentation:
Spoiler:


[1:19]I’m here to tell you a story about how a profession failed to fulfill duty to the public and thus aided and abetted the very real crisis in public pension plans.
…..
[2:00]What we have here is a knowledge problem and a governance problem. The knowledge problem: actuaries shamelessly, although often in good faith, understate the value of future pension payments by as much as 50%.

Their clients want them to.

The governance problem: actuarial standards of practice allow actuaries to cater to their clients, while ignoring potential harm to third parties.

[3:10]Those [actuarial] standards have not prevented, nor even warned the public, about the pension crisis.

Why were Detroit’s pension liabilities such a surprise?
……
[3:30] I’m faulting leaders and institutions here, not individual practicing actuaries.

[6:30]North Carolina, South Dakota, and a few other states appear to be 100% funded. But remember, we’re in the 7th year of a bull market, and they’re using rosy actuarial assumptions.

Actuarial methods and assumptions continue to kick the can down the road and suppress true pension costs.

In spite of this, or in light of this, or perhaps because of this, the actuarial profession remains sanguine. Many of its practitioners seem unconcerned.
....
[9:00] Actuaries compete to provide services to public pension plans. Our code of conduct outlines various duties we have to those who pay for our services.

Actuaries keep contributions low. And although discount rates are the most visible tool for keeping contributions low, there are other internals in actuarial models which tend to lean in the same direction.

Low current contributions cater to current taxpayers but burden future generations with great risks and unacknowledged costs.

The profession rather than the individual actuaries and firms has the primary duty to protect third parties from overzealous catering to clients.


.....
[11:50] Actuarial methods and assumptions are often dictated by state legislatures and/or plan trustees.

Actuaries sometimes argue that this absolves them of responsibility for outcomes. But no one increases benefits or chooses actuarial assumptions without consulting their actuaries. [I disagree, but we’ll move on]

Although I agree elected officials in Illinois and New Jersey bear a great deal of responsibility for the crises over which they presided, I want to know:

Where are the screaming actuaries…yelling in these burning theaters

Have actuaries been willfully ignorant?

Is their silence a required duty to their clients?

What about the profession’s duty to the public?

Is the actuarial profession missing in action?

.....
[15:10] [ASOPs] are brief, defer frequently to professional judgment, and they assert that they define appropriate practice rather than best practice.

I went on the internet and checked it out — you’ll be happy to know that air traffic controllers are required to follow established best practices.

Don’t let the actuaries fly your plane.
……
[16:10] Despite the ASB’s assertion that ASOPs [Actuarial Standards of Practice are principles-based, they’re neither principles-based nor prescriptive. This is just the opposite of FASB’s formulation.

In many cases, the only required action for the practicing actuary is to consider something.

Okay, I considered that.

I complied.

Next!
……
[17:10] Here’s a question: why didn’t Detroit’s pension actuaries warn that the plans were in dire straits?

Answer: they didn’t have to.





Related to that presentation was this piece Jeremy wrote for Forbes:
https://www.forbes.com/sites/pension.../#6367ea6327d8
Quote:
Where Are The Screaming Actuaries?
Spoiler:
When Detroit went bankrupt in 2013, estimates of pension shortfalls multiplied overnight. The city’s regular actuarial firm had reported pension underfunding at $600 million. A special study performed by a second actuarial firm showed underfunding of $3.5 billion.

So which is it? Why two such different estimates? In a recent talk I gave at MIT, I explained the details.

Pension plans covering the employees of state and local governments are in trouble throughout the U.S. The California cities of San Bernardino, Stockton, and Vallejo filed pension-fueled bankruptcies in recent years. Prichard, Alabama simply ran out of money and stopped paying pension benefits. Illinois and New Jersey have become the poster states for public pension plan troubles, while Kentucky and Connecticut plans may be even more poorly funded. It is hard to tell which state plans are in the most difficulty and it is hard to know which Detroit estimate is better than the other.

Actuaries estimate future pension payout cash flows based on demographic and economic assumptions. They calculate “liabilities” by discounting pension cash flows using the expected returns on risky plan assets (presently in excess of 7%). But Finance 101 says that liability discounting should be based on the riskiness of the liabilities, not on the riskiness of the assets. Pension payouts, which are not supposed to be risky, should therefore today be discounted at rates below 3%. A payment of $1,000 due in 20 years has an actuarial (7% discount) value of $258 today. That same payment has a financial value (3% discount) of $554 today. It is the financial value that should prevail in any arms-length transaction in the world’s financial markets.

For many years, actuaries have mismeasured the value of pension plan payouts and therefore not produced economically pertinent nor decision-useful numbers. Actuarial reports further obscure the relevant values by applying actuarial methods that reassign the costs of already-earned pensions into the distant future. This deferral of costs means that benefits earned by today’s workers will have to be paid for by future taxpayers, not by those consuming their services today. Such consistent lowballing of pension costs over the past two decades has made it easy for elected officials and union representatives to agree on very valuable benefits, for very much smaller current pay concessions.


There are, however, measures of pension liabilities and plan funded status that are economically sound and decision useful. The present value of benefits already earned, based on current salary and years already worked, discounted at default-free rates, is both informative and easy to calculate. The New York City retirement systems have published this value for many years. NYC’s largest pension plan, 138% funded in 1999, had declined to 49% funded by 2013. The time series of funded ratios reveals the true volatility of funding progress over time, providing insight into the risky relationship between plan assets and liabilities, a relationship that is obscured in standard actuarial valuations. Economists Robert Novy-Marx and Joshua Rauh have estimated similar numbers for public pension plans nationwide. Although their work is well-respected by economists, it is unlikely to influence decisions in jurisdictions that don’t want to see large liabilities and poor funding ratios. Furthermore, Novy-Marx and Rauh must rely on official actuarial reports from which they estimate their alternative numbers. Plan actuaries, working with basic plan data and specialized software could, if they or their clients wished (or if they were directed to do so by the actuarial profession), produce more precise numbers like those in NYC.

So why haven’t actuaries been telling the world what’s going on? Why aren’t they screaming in these burning theaters? The answer is that they don’t have to! U.S. Actuarial Standards of Practice (ASOPs) endorse the lowball estimates discussed above. The U.S. Code of Professional Conduct calls upon actuaries to be loyal to their clients. In the case of public plans, the clients are usually the boards of trustees that administer the plans; the state and local governments that sponsor plans and the unions representing public employees also may hire actuaries. None of these clients wishes to hear a $554 financial value when they have difficulty paying the back-loaded and understated costs associated with meeting a $258 actuarial value.


The actuarial profession acknowledges, but does not fulfill, its duty to the public. So Detroit, which is it - $600 million or $3.5 billion underfunded? Based on numbers calculated by the second actuarial firm in Detroit, I have estimated that the city’s economic unfunded liability for benefits already earned exceeds $7 billion. It could also be as much as $9 billion, and I could be more precise if I had better data.

The public will get the best estimates only when the Actuarial Standards Board requires the actuaries, who do have the data, to produce economically pertinent and decision useful numbers.

Jeremy Gold, FSA, MAAA, CERA, PhD is an actuary and economist, applying both disciplines to pensions, with an emphasis on financial economics, corporate finance, and investments.


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Old 07-14-2018, 07:50 AM
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Default

Some threads (linked to by DTNF in the RIP thread)

[2015] Concerned Actuaries:
http://www.actuarialoutpost.com/actu...d.php?t=298304

[2010] Default Discount rates for pension liabilities

http://www.actuarialoutpost.com/actu...d.php?t=201160

[2010] The Illusion of Pension Savings - NY Times
http://www.actuarialoutpost.com/actu...d.php?t=201460

[2007] Arbitrage worksheet
http://www.actuarialoutpost.com/actu...d.php?t=105104
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Old 07-14-2018, 07:56 AM
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more threads:

[2016] AAA and SOA censor research and disband voice of pension finance
http://www.actuarialoutpost.com/actu...d.php?t=311818

This is a link to the paper the AAA/SOA would not publish:
http://www.pensionfinance.org/papers/PubPrin.pdf
Quote:
Financial Economics Principles
Applied to Public Pension Plans
Ed Bartholomew, Jeremy Gold, David G. Pitts, Larry Pollack
November 11, 2016
[2008] Actuaries Scrutinized! (shows up in NYT article, then further comments)
http://www.actuarialoutpost.com/actu...d.php?t=139274
JG's first post on that thread: http://www.actuarialoutpost.com/actu...85#post2895285

from the NYT article:
http://www.nytimes.com/2008/05/21/bu...l?ref=business

Quote:
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.

“Financial burdens have been hidden” as a result, said Jeremy Gold, a New York actuary and economist who was one of the first to call attention to the gap between actuarial figures and economic reality. Many economists now agree with Mr. Gold, saying they believe actuaries are routinely underestimating the cost of providing governmental pensions by as much as a third.

The difference “is going to come out of services, and the services are for the working poor,” Mr. Gold said.
....
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Old 07-15-2018, 08:54 AM
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Some of his Congressional testimony:

https://waysandmeans.house.gov/Uploa..._Testimony.pdf
Quote:
Statement before the United States House of
Representatives
Committee on Ways and Means
Subcommittee on Oversight
Hearing on the Transparency and Funding of
State and Local Pensions
Jeremy Gold, FSA, CERA, MAAA, PhD
Jeremy Gold Pensions
May 5, 2011
transcript of testimony:
https://nunes.house.gov/uploadedfile...2hhrg70881.pdf


https://waysandmeans.house.gov/Uploa...ony_091714.pdf
Quote:
Statement before the United States House of
Representatives
Committee on Ways and Means
Subcommittee on Select Revenue Measures
Hearing on Private Employer Defined Benefit Pension
Plans
Jeremy Gold, FSA, MAAA, CERA, PhD
Jeremy Gold Pensions
September 17, 2014
same testimony, transcripts:
https://waysandmeansforms.house.gov/...umentID=398497
https://docs.house.gov/meetings/WM/W...t-20140917.pdf
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Old 07-15-2018, 08:55 AM
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another page with links to papers:
http://pensionfinance.org/papers/alphaDH.html
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