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U.S. public pension funds—those that support firefighters, police officers, and other retired public employees—lost a median 7.9 percent in the fiscal year ending 30 June, according to the Wilshire Trust Universe Comparison Service, the funds’ worst drubbing since 2009 during the Great Recession.

The funds shrank by 8.9 percent during April, May, and June this year when equity and bond markets cratered amid fears surrounding inflation and prospects of a global recession.

Typically, stocks and bonds tend to balance each other: when the price of one sinks, the other rises.  

In the second quarter of 2022, that failed to happen and both slumped, leaving pension funds little room to maneuver.

Even after a stellar 27-percent return last year as markets boomed, public pension funds remain hundreds of millions of dollars short of their obligations, as we reported in “Pension Funds, Facing Deficits, Borrow to Invest” (5 Jul 2022), and “The Pension Fund Plummet” (2 Aug 2022) among other articles.

That growing shortfall led the funds to increase their investment in growth stocks to 57 percent as of 30 June, Wilshire’s data shows.

Larger funds weathered markets’ turmoil less badly than smaller ones.

Those with $5 billion or more in assets lost 5.1 percent, compared to a 6.6-percent plunge among funds with $1 billion to $5 billion under management.

The largest funds tend to keep 20 percent or more of their money in private equity and other so-called “alternative assets” that offer a greater chance of sizable gains.

The California Public Employees Retirement System, the nation’s largest public pension fund, earned 21.3 percent on its private equity holdings and 24.1 percent from real estate in the year ending 30 June, trimming the fund’s loss for the year to 6.1 percent.

Despite their financial ups and down, public pension funds are obligated to pay fixed monthly amounts to retirees.

As a result, governments that manage the funds face the prospect of raising taxes or cutting public services, or both, to fill the holes in their pension funds.

If a pension fund collapses, its payments are continued through the Pension Benefit Guaranty Corp. (PBGC), a federal agency that insures pension funds. Certain conditions apply that may reduce payment amounts.

TREND FORECAST: As we noted in “The Pension Fund Plummet” (2 Aug 2022), more Americans are increasingly having to choose which basic expenses to not pay from month to month, workers will balk at seeing more taken out of their paychecks to fund a far-off retirement.

A growing number of retirement funds will be unable to meet their obligations, especially when the 65-million-strong Generation X begins to retire in 10 years.

When that happens, state and federal taxpayers will be handed the bill—the same taxpayers already covering Social Security and Medicare costs for Baby Boomers.

Ultimately, to prevent a collapse of the pension system and widespread bankruptcies among retirement funds, legislatures will be forced to step in with solutions that will roil the retirement plans of millions of Americans.

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