Costs and liabilities of US public pension systems in a low-return environment

Abstract

In recent years, a growing number of capital market professionals have projected a low-return environment in US investment portfolios – where returns in most asset classes are expected to drop below historical rates. While these specific forecasts may not fully materialize, it is natural for cyclical investment markets to go through extended periods of lower returns, creating significant risks for public pension systems which rely on investment returns to sustain their long-term solvency and offset budgetary contributions. This paper uses a simulation method to examine the long-term effect of a low-return environment on the unfunded liabilities and contribution costs of US public pension systems while considering the moderating effects of asset allocation strategies, amortization approaches, and contribution policies.

Fiscal condition, institutional constraints, and public pension contribution: are pension contribution shortfalls fiscal illusion?

“…Delaying pension contributions lowers pension assets and foregoes future returns on investment. As the low market return in recent years significantly decreases investment earnings, this strategy becomes even risker to sustain pension funding levels and overall government fiscal health (Chen et al, 2021; Yang & Mitchell, 2005). Therefore, it is important for state decision‐makers to carefully weigh in the short‐term benefits of using pension contribution as a fiscal slack tool and the long‐term consequences of growing unfunded pension obligations.…”

Navigating the Public Pension Landscape: An Examination of Asset Allocations

“…Third, by distinguishing the effects of pension plans' institutional structure and financial conditions on their equity and alternative investments, this study sheds light on the differences in pension plans' preference for these two asset categories. Given the significant impacts of asset allocations and investment returns on pension funding ratio and government contributions (Chen et al, 2021;Davidyan, 2021;Peng & Wang, 2017), a comprehensive knowledge on the factors that influence public pension plans' asset allocations is a critical first step to understand public pension funding solvency and government long-term fiscal health.…”