The Boston College Center for Retirement Research just tackled a valuable question.
In a January 2017 article titled “State and Local Pension Reform Since The Financial Crisis,” researchers Jean-Pierre Aubry and Caroline Crawford documented some significant changes, including benefit cuts and higher employee contribution requirements, particularly in plans with relatively high cost burdens. They also show a tendency for states with stronger legal protections for current workers to focus benefit reductions on new hires.
But the dog that didn’t bark may be the most interesting, and dangerous, dog of them all.
In a research effort looking at changes since the financial crisis, the word “investment” is nowhere to be found in the article. The study is focused only on benefits, not on the investments backing up those promises.
It’s like the financial crisis never happened!
Maybe that is how people are thinking these days, after the massive bailouts of 2009/2010. We don’t need to worry about investments or reform in portfolio management, the implication runs.
Moral hazard to the MAX! Danger, Will Robinson, Danger!
Meanwhile, the massively-underfunded Illinois Teachers Retirement System remains overwhelmingly invested in equities. And the fund for Dallas public safety workers (many of whom have been ‘running on the bank’) has had huge allocations to real estate investments.
These 2 plans have lots company, around the nation.
A close and comprehensive look at ‘reform,’ if any, in public pension investment management since the financial crisis would be a good thing to undertake. And the work I’ve done so far suggests, if anything, that risk exposures in public pension plans have risen, not diminished, since 2007.
With taxpayers bearing most of the downside. Like what they face with our financial crises.
Some things never change.
Speaking of changes to benefits, many public sector worker representatives decry efforts to reform away from guaranteed, defined benefit to defined contribution / 401k style-systems. “That would be forcing us to be in the risky stock market!”
Trouble is, the system is forcing taxpayers to be in the stock market, especially in states with strong guarantees for benefits. And on the downside.
Tick, tock, tick …