Public Pensions: Risk Finds A Way

What’s missing from almost all discussions about pension reform is the idea that every time the market goes down, taxpayers are on the hook. Unfortunately, given the current structure of state pensions, that outcome is unavoidable and likely to be repeated.

The case for keeping public pensions in their current form hinges on, among other things, the idea that a portfolio weighted heavily in stocks provides something of a “free lunch” to taxpayers and it makes some sense. Taxpayers pay a relatively small amount into pension funds for each government worker, the market will very likely go up over that worker’s career, and taxpayers don’t have to pay the difference between their contribution and the benefits paid to the worker.

But there ain’t no such thing as a free lunch.

What has happened in Kentucky and other states is this: Lawmakers watched as markets boomed in the 1990s and chose to pare back contributions in order to fund more immediate spending desires. Lawmakers also found small ways to boost benefits for public workers because, after all, look at all the money in that fund! When markets tanked, as they inevitably sometimes do, taxpayers suddenly found themselves in the position of responsibility for the gap. The money that should have gone to maintain pension funding levels had already been spent elsewhere.

This kind of grasshopper thinking might not be much of a problem if that retirement plan were owned and funded by the same single individual. If you choose not to contribute to your own retirement fund, that’s your choice and I wish you the best of luck. No one else should be on the hook for your shortsightedness. But that’s very different from how public pensions operate. In short, the pensioners must be paid as a matter of contractual obligation.

Commentators and would-be reformers are almost entirely focused on getting that funding back to the exclusion of changing the system. The problem is that this time, decades later, the costs can be absorbed by precisely two groups: taxpayers and pensioners.

The Wall Street Journal notes that public pensions are still heavily weighted in stocks, and at least one of the biggest funds in Kentucky is more heavily into stocks than most pension funds.

The $19.9 billion Teachers’ Retirement System of Kentucky now has 62% of its assets in equities, close to the 64% it had in 2007. It sold $303 million in stocks Jan. 19-20 to rebalance its portfolio following gains. From Feb. 6-8, as U.S. markets plunged, the fund bought another $103.5 million of stocks.

“We are definitely a long-term investor and look to volatility as an investing opportunity,” said Beau Barnes, the system’s deputy executive secretary and general counsel.

Lawmakers are giving precious little attention to the idea that getting taxpayers out of the public employee retirement business should be the overriding goal.

Archives