Investment returns may be up since the recession, but public pensions are still in deep, deep trouble. On Wednesday, the hedge fund Bridgewater Associates released the results of a “stress test” on American public pension plans, and they weren’t pretty. According to the report, 85 percent of all plans are on track to go bankrupt within 30 years unless their average rate of return increases to 9 percent. Barring something truly miraculous, that’s unlikely to happen: Bridgewater expects the rate to be closer to 4 percent, and even the unrealistically optimistic estimates given by pension funds themselves rarely exceed 8 percent. As USA Today notes, the potential shortfalls are staggering:
Public pensions have just $3 trillion in assets to invest to cover future retirement payments of $10 trillion over the next many decades, Bridgewater says. An investment return of roughly 9% a year is needed to meet those onerous obligations.
This doesn’t mean, of course, that 85 percent of pension plans will actually go bankrupt. These numbers depend on public officials not taking the necessary actions. States and cities are slowly realizing that they have a major problem on their hands. Many will take preventative measures, either by cutting benefits or by increasing contributions to the plans (more likely a combination of the two).
But given the history of political “punting” by city officials and state lawmakers when it comes to pension reform, it’s probably a safe bet that more than a few cities and states will end up in the same position that Detroit, Chicago, and San Bernardino find themselves in.