American public pension funds struck gold last year. In 2013, the median gain for public pension funds was a staggering 16.1 percent—much higher than what we saw in the depths of the recession, and more than double the expected rate of return for most plans, which generally falls between 6 and 8 percent. The increase was fueled mostly by an extremely strong year on the stock market, where the S&P rose by 30 percent to a new high last year. Coming as it does after years of low returns, this news couldn’t be better timed. Bloomberg digs deeper into the data:
Assets of the 100 largest U.S. public pension funds rose to $3.06 trillion in the third quarter of 2013 from $2.94 trillion in the previous three months, the highest level since 1968, according to the U.S. Census Bureau.State and local government funds with less than $1 billion of assets had a median return of 16.45 percent, while “mega” plans returned 15.76 percent, Wilshire said.
This year’s numbers are dazzling, to be sure, but state and local pols shouldn’t count on these kinds of returns year after year. A few years of double-digit gains doesn’t mean that an 8 percent expected rate of return is reasonable over the long term, especially when they’re preceded by years of anemic growth. Detroit’s gross mishandling of its “excess earnings” during past bull market years should warn us of the dangers of assuming that politicians and pension officials actually appreciate and respect this fact.