EDITORIAL: Public pensions ramp up risk to boost returns
Risky investment strategies often look great until there’s a downturn.
December 5, 2021 - 9:00 pm
Risky investment strategies often look great until there’s a downturn. Taxpayers should hope public pension plans don’t provide a vivid demonstration of that principle.
Public pensions have long over-promised returns and under delivered. There are many reasons for this. One is that pensions are a dry topic. The people most interested in them are those who will collect decades of payouts. For the public, it’s all math and jargon such as “unfunded liabilities” and “discount rates.”
There’s also a time frame problem. A politician in 1998 can garner immediate favor from politically powerful unions by boosting future pension payouts. But when the bill for those changes comes due years or decades later, he or she is likely to be long gone. It’s someone else’s problem.
Finally, defined benefit pensions are complicated. They involve calculating payouts decades in the future. There are assumptions about life expectancy and age of retirement. They’re the kind of topics only a life insurance salesman could love.
All this makes it easy to trust the “experts.”
But the experts keep getting it wrong — and leaving taxpayers on the hook. Across the country, public pension plans have promised nearly $5 trillion more in benefits than they have the money to pay, according to a 2020 study from the American Legislative Exchange Council.
To help make up this shortfall, pension managers are seeking ways to boost their investment returns. That includes keeping less of their holdings in cash. The Boston College Center for Retirement Research found the average public pension aims to have cash holdings of 0.8 percent. That’s down from 0.95 percent in 2017, although it’s above the 0.76 percent target set in 2012.
Pension plans need to hold cash because they are paying out benefits every month to current retirees. During strong markets, having more invested produces larger returns. But when the market tumbles, pension plans may have to sell other assets, potentially at a loss, to make ends meet. As The Wall Street Journal reported, pension plans have also turned to riskier investments that can require more capital during downturns.
The massive California Public Employees’ Retirement System has gone one-step further. Its board approved borrowing against up to 5 percent of the fund’s value in an effort to boost returns.
You don’t need to be an expert to see the big picture. Government pension plans have promised more than they can deliver. Instead of leveling with taxpayers, pension managers are taking more risks — potentially leaving taxpayers in an even deeper hole.