NCPA - National Center for Policy Analysis

Pension Fund Risks in Wild Market

August 25, 2011

Though union leaders and their political supporters would seize on every upward market move to proclaim the end of the pension crisis, the recent Wall Street upheaval should remind taxpayers that states and cities still need fundamental pension reform to lower the long-term risks for taxpayers and bring pension costs under control, say E.J. McMahon and Steven Malanga, senior fellows at the Manhattan Institute.

  • Because so many government pension systems are underfunded, their managers have been chasing high returns by betting heavily on volatile investments like stocks, producing wild swings in the value of the funds' assets.
  • Even with the run-up in the market earlier this year, New York's State and Local Pension Fund assets were still some $9 billion lower than their peak in 2007.
  • Those assets have now declined by perhaps another $10 billion to $15 billion in the current market debacle.
  • Meanwhile, even as the fund struggles to get back to 2007 levels, annual benefits payments to retired workers have grown $2 billion in the last four years -- more than $400 million a year.

Union leaders and their advocates do understand the risks in the stock market.  They just want taxpayers to bear it.  That's why it's important not to buy into claims that just a few more good quarters in the stock market could bail out most state and local pension systems.  In fact, even as pension funds were proclaiming that their assets were rising earlier this year, they were sending out bigger bills for pension contributions to cities and states, as they have been doing for years now, say McMahon and Malanga.

Source: E.J. McMahon and Steven Malanga, "Pension Fund Risks in Wild Market," Politico, August 19, 2011.

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