The Hidden Danger in Public Pension Funds

12/30/13
 
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from NCPA,
12/30/13:

Public-employee pensions are larger and their investments riskier than at any point since public employees began unionizing in earnest nearly half a century ago, says Andrew Biggs, a resident scholar at the American Enterprise Institute.

How much riskier are public pensions now?

– Public pensions pose roughly 10 times more risk to taxpayers and government budgets than in 1975.

– In 1975, state and local pension assets were equal to 49 percent of annual government expenditures, according to Biggs’ analysis of Federal Reserve data.

– Pension assets have nearly tripled to 143 percent of government outlays today.

– That’s not because plans are better funded — today’s plans are no better funded than in 1980 — but mostly because pension plans have grown as public workforces have aged.

And pensions can expect to take losses more often because of increased investment risk.

Meager yields leave America’s enterprising public-pension plan managers with a choice: Accept a lower return — forcing higher taxpayer contributions — or take on more risk to keep 8 percent returns flowing.

[To maintain an] 8 percent return portfolio … the standard deviation of public pension investments equaled 1.8 percent of state and local budgets in 1975. That figure crept upward to 2.2 percent in 1985, and reached 5.8 percent in 1995. Today it stands at 19.8 percent.

Risk began inching upward after 2000 and has increased rapidly since the recession as low-risk assets continue to fall.

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