I admit that I like to spend a good portion of my spare time at the casino. I gamble even though I know that the odds favor the house. At least I’m gambling with my own money. Public employee pension systems, on the other hand, make bets with other people’s money. Increasingly, they are taking riskier bets in the hope of hitting the jackpot. That’s what the Pew Charitable Trust found in their new study. As the study’s authors show in the figure below, public pensions are shifting away from safer investments (e.g., U.S. Treasuries and Corporate Bonds) and toward riskier assets (such as equities and commodities) that are expected to deliver higher returns on investment.
This behavior is taking place in Missouri. For example, in the late 1990s, the Missouri Department of Transportation and Highway Patrol Employees Retirement System (MPERS) had 42 percent of their assets in fixed income and cash. Equities and alternative investments such as real estate made up the rest. Now, MPERS has 22 percent of its assets in cash and fixed income.
The pensions are doing this “to deliver higher long-term returns in order to keep funding costs low . . .” In fact, in one of our previous policy studies, Andrew Biggs noted this phenomenon when examining how Missouri’s public pensions value their liabilities: “U.S. public sector plans, by contrast, have taken on greater investment risk, because doing so allows them to lower the accounting value of their liabilities and put off difficult decisions such as raising contributions or lowering benefits.”
I don’t have a problem with a pension plan seeking higher returns, but if these investments don’t deliver as hoped, then Missouri taxpayers will be on the hook to make up the shortfall. That is why I favor retirement plans such as defined contribution plans or cash balance plans that limit the exposure of the taxpayers to investments failing to generate expected returns. Hopefully, we can make a shift before one of these risky bets fails to pay off.