Timothy Martin writes at the Wall Street Journal that public pensions in the United States are about to record their lowest long-term returns ever. I’ve warned about the threat to pension funds posed by low interest rates time, and time, and time, and time again. Now the chickens are coming home to roost, and public employees, and taxpayers will be the ones who pay the price for sustained low interest rates engineered by the Fed.
The drop in 20-year annualized returns is significant because officials who oversee retirements for police officers, firefighters, teachers and government workers have long said one bad year or two isn’t as important as the long-term average, and they would earn enough money over decades to pay for retiree obligations.
Those long-term returns have dropped below expectations due in large part to two recessions over the past 15 years and a sustained period of low interest rates. Pension funds invest heavily in fixed-income securities, so the loss of a few percentage points of bond yield hinders their ability to post steady returns.
Eileen Norcross of the Mercatus Institute was warning about public pensions all the way back in 2011, her words are no less true today than they were then.
Public Pensions: Unfunded Promises
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