Public pensions roll the dice

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  • Investment losses= limited resources for gov't programs & some public employees may face #benefit cuts

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  • 2007-2010:public pensions’ target asset allocations shifted 7% of assets to higher-returning (but riskier) investments

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  • More risk means #pensions impose a contingent liability on #taxpayers to bail out funds if investments fall short

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Pensions for state and local government employees lost 27 percent of the value of their investments from 2007 to 2008 and today assets are still below 2007 levels, while liabilities have continued to rise. In part, these investment losses stemmed from a decades-long trend toward riskier investments, which began with a shift toward equities in the 1980s, and today toward so-called alternative investments such as private equity and hedge funds. As a result of investment losses, taxpayers face larger pension contributions, other government programs are starved of resources, and some public employees may face benefit cuts.

How have these losses affected pensions’ investment strategies going forward? Did the financial meltdown result in public-sector pensions backing off these high-risk investment strategies, or have they doubled down in an attempt to make up their losses?

Andrew Biggs is a resident scholar at AEI.

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