About four years ago, the American Academy of Actuaries (AAA) published a valuable “issue brief.”
It was titled “The 80% Pension Funding Standard Myth.”
The brief pointed out how “80%” had taken on a mythical life of its own, gaining apparently-widespread acceptance as a standard for determining if a pension was “well-funded” or not.
An Appendix to the article compiled a wide variety of supposedly-expert and/or authoritative sources that had apparently been brainwashed into this “benchmark.” They included the Government Accountability Office (GAO), the Pew Charitable Trusts, the Stanford Institute for Economic Policy Research, various state legislatures and governors’ offices, and credit rating ‘agencies’ like S&P and Fitch.
In a way, people that accept 80% as a benchmark for sound funding are finding a way to call failure success.
The AAA study stressed that no single ratio should be identified as a bright-line test, and called for over-100% funding.
I’m reminded of a discussion over bank capital regulation at the Federal Reserve, about 15 years ago.
Participants were rigorously discussing to the nth degree of sophistication over how bank capital was regulated, with all the complex ways regulators interpreted “capital” around a benchmark 8% minimum requirement for “adequate capitalization.”
One participant (me) then asked something like “Wait a minute. Why are we taking this 8% for granted? When did this become the standard? Why is 8% rational?”
Nobody answered this.