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Public Pension Payouts: Will Enough Money Be There for You?
Are Public Pension Funds "Counting Chickens Which May Not Hatch?"

By Bob Stokes
Wed, 22 Sep 2010 11:30:00 ET
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A pension is supposed to help you enjoy your well-earned retirement.
But did you know many states are counting on healthy stock market returns to keep pension funds from falling in a "funding hole"? According to the Wall Street Journal (9/18):
"Many of America's largest pension funds are sticking to expectations of fat returns on their investments even after a decade of paltry gains, which could leave U.S. retirement plans facing an even deeper funding hole and taxpayers on the hook for huge additional contributions.
"The country's 15 biggest public pension systems have an average expected return of 7.8%, and only a handful recently have changed or are reconsidering those return assumptions..."
A "strategic investment" firm is advising the state of New Jersey on its $68 billion pension fund. The firm said only "modestly higher risk" should be taken on if more money went into "alternative investments." Bloomberg reported (9/16):
"New Jersey’s pension fund should put more money in alternative investments such as private equity and real estate to boost returns and protect against stock losses, consultants told the State Investment Council."
The same news article said that of June 30, 2009, New Jersey's pension was underfunded by 66%.
Given these extraordinary future obligations, it is no surprise that public pension fund administrators go further out on a limb for higher returns -- and the limb was weak already. Consider these separate excerpts from EWI's Financial Forecast Service publications just this year:
"...public pension funds, such as the one run by the State of Wisconsin Investment Board, just approved a plan to borrow up to 20% of its total assets to buy more bonds. Eventually, public pension payouts will have to come down." (Feb. 2010)
"Various public pension funds...are grossly underfunded and 'looking everywhere for high-yielding investments'...The New York Times reports that states such as Colorado, North Carolina and Wisconsin recognize that they cannot reduce their investment return assumptions of 7.25% to 8.5% per year (which they have failed to match for years) without producing even greater shortfalls than they currently have in their future benefit obligations. So, in an attempt to make up for their current and future shortfalls, they are assuming higher risks in their portfolios. The former head of the Texas Pension Review Board summed it up this way, 'In effect, they’re going to Las Vegas. Double up to catch up.'" (April 2010)
"Some government-run investment funds are recklessly rolling the dice by participating heavily in mania-era investment ploys. In Illinois, for instance, the state pension fund is using derivatives to 'recoup returns' and try and 'fix' a 60.9% underfunding. In Detroit, the pension fund for police and fire departments invested millions in a casino venture that has been downgraded three times by rating agencies. These schemes are vestiges of the old bubble era that will steepen the cost to taxpayers and pensioners." (July 2010)
What's next for public pension funds? For that matter, where do we see the economy and financial markets headed? Read the latest Financial Forecast Service risk-free via this link.
(Enjoy free e-mail newsletters from EWI -- get your free reports by clicking here)

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