Looming Crisis


Public employee retirement systems across the nation have a major problem. Almost all of these pension plans currently assume investment returns that are well beyond levels that are reasonably achievable going into the future. The result is that they appear better funded than they really are. Ultimately, the inevitable and substantial shortfalls that result will become the responsibility of taxpayers.

The current shortfalls are not, as conventional wisdom asserts, the one-time result of a stock market decline in 2008. The shortfalls are the result of the gap between faulty assumptions and actual returns, a gap which will ensure an ever-widening shortfall. Most policy makers assume that their recent provisions to address the shortfall will cure the problem over upcoming decades. Instead, the hole is many times larger than they believe. Some policy makers have even started advocating “reforms” that will burden the pension plans in order to fund programs outside of the plans.

There are significant implications for investors, taxpayers, plan beneficiaries, and other constituents. A wrongly-diagnosed problem leads to ineffective solutions and worsened conditions.