In a May 30, 2017 editorial, EconoSTATS Managing Editor, Wayne Winegarden, describes the discouraging data regarding the health of public sector pension plans. A future crisis is forming due to three unsound practices:
- State legislatures are not allocating enough tax dollars to the pension funds based on current government accounting practices. Between 2001 and 2015, state and local governments only contributed 88 percent of the required contributions. In total, according to the Pew Charitable Trusts, the state public pension plans are underfunded by $1.1 trillion.
- Public pension funds currently assume an unrealistic return on their investments. While private sector plans have an assumed annual return to a bit over 4 percent, consistent with the current return environment, public sector pension funds are, on average, assuming they can annually earn around 7.5 percent. It is unlikely that many public pension plans will meet such a high annual return.
- Public pension funds are also carrying too much risk in their investment portfolios. For example, during the 1970s, public pensions used to invest one-quarter of their assets in riskier “equity-like” investments such as stocks, real estate, hedge funds, and other assets subject to substantial investment risk. That figure has now increased to two-thirds of their assets.
The result will be either cuts to promised pensions; large increases in future taxes; large reductions in future spending; or some combination of all three. The sooner the precarious financial circumstances are recognized, and sound financial practices implemented, the smaller the ultimate costs will be.
Read the full editorial here