Despite enormous gains in the stock market over the past decade, Public Union Pension Managers are Running Out of Retirement Money.

The graying of the American worker is a math problem for Farouki Majeed. It is his job to invest his way out.

Mr. Majeed is the investment chief for an $18 billion Ohio school pension that provides retirement benefits to more than 80,000 retired librarians, bus drivers, cafeteria workers and other former employees. The problem is that this fund pays out more in pension checks every year than its current workers and employers contribute. That gap helps explain why it is billions short of what it needs to cover its future retirement promises.

“The bucket is leaking,” he said.

The solution for Mr. Majeed—as well as other pension managers across the country—is to take on more investment risk. His fund and many other retirement systems are loading up on illiquid assets such as private equity, private loans to companies and real estate.

So-called “alternative” investments now comprise 24% of public pension fund portfolios, according to the most recent data from the Boston College Center for Retirement Research. That is up from 8% in 2001. During that time, the amount invested in more traditional stocks and bonds dropped to 71% from 89%. At Mr. Majeed’s fund, alternatives were 32% of his portfolio at the end of July, compared with 13% in fiscal 2001.

Understanding the Pension Crisis

Thanks to the Fed, 10-year bonds yield 1.5%. Pension plan assumptions are 6.5% or so. 

The stock market has easily outperformed 6.5% annually, but when plans are underfunded and more money goes in in retirement income than goes in due to demographics, there are still shortfalls.

Demographics, Birth Rate, and the Covid Baby Bust 

The fact is Demographics, Birth Rate, and the Covid Baby Bust are Quite Deflationary

Deflationary and Inflationary Impacts

1. Inflationary: Shortage of workers increases wage pressures
2. Deflationary: Fewer workers support an increasing number of retirees
3. Deflationary: Older workers need more assistance, buy fewer things, travel less.
4. Deflationary: More government debt and deficits. Government spending has a negative impact on real GDP.

The net impact is rather deflationary, not inflationary.

Add to the above the potential implosion of pension plans due to excess risk taking. 

I expect a 50% decline or more in the stock market at some point. But it will not take that to cause massive convulsions. 

A flat market or even 2% gains on average for 10 years would make many pension plans insolvent.