There’s been lots of press recently on the long term stability of public pensions and what must be done to fix the system. I won’t recount the debate but the upshot is that many pensions are systematically underfunded and the numbers get worse when pensions change their expectations about future market returns. Much of this has to do with actuaries’ admonitions that we should expect many people to live into their centenarian years.
People who know more about this might dispute the degree of underfunding but nobody really knows anything about expected future market returns. It’s probably safe to say, given current CAPE 10 valuations, that the next decade won’t be pretty.
People who know more than I do about the market suggest there are two basic strategies. One is to minimize expenses by investing in low-cost index funds; the other is esoteric investments chasing outside returns, such as in MLPs or New Zealand avocado farms or whatever. Of course, such strategies have different implications for volatility.
Here’s the thing: we know that the pension storm is real and that things could get bad fast. Moreover, even if this is all just a political dynamic fueled by unnecessary fears, it doesn’t matter if the consequences are massive changes to the traditional public pension systems.
What happens to the traditional civil service when this happens? Will people continue to become public school teachers? Will people demand higher base wages? Will the best and brightest seek jobs in the private sector instead?
Maybe we’ve seen all this before, but I doubt it. And I don’t hear much conversation that starts with the proposition that traditional public pensions won’t exist for much longer. It isn’t a matter of if, but when.