Tags: Dorfman | public | pension | funds

Jeffrey Dorfman: Public Pension Funds Have 'Little Hope' for Survival

By    |   Thursday, 18 September 2014 02:06 PM

Much has been written about the vastly underfunded public pension system, and there's "little hope" for its survival, says Jeffrey Dorfman, a professor of economics at The University of Georgia.

State politicians have repeatedly underfunded pension plans to avoid cutting spending, he writes in an article for Forbes. At the same time, these politicians have repeatedly increased benefits to score votes.

A total of 26 states had pension plans that were less than fully funded at of 2012, according to Bloomberg.

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"A sign of how bad the morass of public pension funds has become is that most of them have become more underfunded in the past five years," despite a tripling of the S&P 500 index, Dorfman says.

Given that dynamic, "is there any hope for their survival?" he asks.

"The answer is probably not, but if there is a way to save public pension funds, it will require a new political calculus by the two parties most responsible for the current sorry state of affairs: state politicians and government employee unions," Dorfman notes.

"Public sector employees and their union leaders need to make a hard choice: settle for realistic, smaller pensions that they are sure to collect or gamble on larger pensions that can only be paid for with well-above average future investment returns or by huge tax increases. Bigger pensions only look attractive until you factor in the risk of collecting nothing."

Public pension funds have increasingly turned to alternative investments, such as hedge funds, to juice their returns.

But they may be having second thoughts after the California Public Employees’ Retirement System (Calpers), the country's largest public pension fund, decided this week to dump its $4 billion of hedge fund investments, after paying high fees for mediocre returns.

The gravitation to alternative investments has "coincided with an increase in fees as well as uncertainty about future realized returns, both of which may have significant implications for public pension funds' costs and long-term sustainability," according to a report from The Pew Charitable Trusts.

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Much has been written about the vastly underfunded public pension system, and there's "little hope" for its survival, says Jeffrey Dorfman, a professor of economics at The University of Georgia.
Dorfman, public, pension, funds
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2014-06-18
Thursday, 18 September 2014 02:06 PM
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