Saving America’s Public Pensions
US public pension schemes are increasingly facing funding gaps that will be difficult to close in today's capital market environment. But with innovative strategies designed to leverage these large investor's inherent advantages, "difficult" need not become synonymous with impossible.
SACRAMENTO – Much has been written in recent years about the plight of US public pensions. There are growing concerns about underfunded liabilities, rising implicit tax burdens, and broken promises to beneficiaries. These are not groundless fears. Many US public pensions are indeed facing severe financial pressures.
These problems have begun to fuel doubts, among both current and future pensioners, about the reliability of their benefits over time, and thus about their economic security after they retire. But there are still many ways that investment staff, sponsors, and beneficiaries could work together to restore faith in the system. The key is first to understand the challenges facing the US public pension industry. One can then start to map out strategies for putting public pensions on a sound financial footing.
The Pension Puzzle
The main challenge facing the public pension industry is the high assumed rates of returns on pension assets relative to what equities or bonds are likely to deliver. Many US public pension funds expect a rate of return in the neighborhood of 7% per year. But in today’s capital-market environment, achieving that sustainably over the long term has become an increasingly daunting task.