Public Pensions: "Tremendous Risk"?

How much riskier are public pensions for taxpayers and government budgets these days? According to a Wall Street Journal opinion piece by American Enterprise Institute scholar Andrew G. Biggs, public pensions pose about a 10 times greater risk than they did in 1975.

Since that time, the proportion of government budgets going to fund pensions has multiplied:

“In 1975, state and local pension assets were equal to 49% of annual government expenditures, according to my analysis of Federal Reserve data. Pension assets have nearly tripled to 143% 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.”

Biggs says that whereas seven active employees backed one retiree in 1950, the ratio has dropped to 1.75 active workers for every pensioner.

On top of that, Biggs notes that pension planners are having to make riskier investments to keep up with the traditional 8 percent average yield rate safer investments had in brighter days. The toss-up is that if pension planners stick with safer—but less profitable—investments now, a greater burden falls on taxpayers to make up the difference.

Biggs finds a two-fold cause: “Larger pensions and riskier investments combine to increase risk to state and local budgets.”

What is his way out?

“The only real option, then, is to make structural changes, including more modest benefits and increased risk-sharing between plan sponsors and public employees. But that will only happen if elected officials accept that they can’t continue with business as usual without accumulating tremendous risk.”

>>Source: Biggs, Andrew G. “The Hidden Danger in Public Pension Funds.” The Wall Street Journal. 15 Dec. 2013.