Investment earnings make up around 60 percent of pension benefits. Over the past three decades, state and local pension plans have changed their investment strategies in attempt to boost investment returns. Plans originally invested in fixed-income bonds, but beginning in the 1980s and 1990s, began increasing their investments in stock and equities. In the past decade, plans have increased alternative investments such as private equity, hedge funds, real estate, and commodities.
The Urban Institute created an interactive grading tool assessing each state retirement plan. States are graded on seven key criteria: rewarding younger workers, promoting a dynamic workforce, encouraging work at older ages, providing retirement income to short-term employees, providing retirement income to long-term employees, making required contributions, and funding ratio.
Public pension systems faced significantly unfunded liabilities after the financial crisis. In response, a number states reduced the cost-of-living adjustments (COLA) for public employees. In this Center for Retirement Research brief, the authors examine the changes and response to COLA reductions in the years after the economic crisis.
Over $210 billion is distributed annually from state and local retirement trust funds to beneficiaries. Public pension are financed through a combination of contributions from public employers (an average of 26 percent of all public pension revenue from 1982 to 2011), employees (an average of 13 percent), and investment returns (an average of 61 percent). Retirement programs, however, represent a relatively small percentage of total government spending according to NASRA’s evaluation of U.S. Census Bureau data.
Who benefits from pension enhancement? According to an analysis of benefit enhancements in Missouri, teachers who stay in one system for an entire career. But this comes at the expense of novice or future teachers.