U.S. Pension Funds Fell Short in 2019

Summary

WSJ Your Money Briefing — “U.S. Pension Funds Fell Short in 2019”

Date: August 7, 2019
Host: J.R. Whalen
Guest: Heather Gillers, Wall Street Journal Reporter

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Episode Overview

In this episode, host J.R. Whalen and reporter Heather Gillers discuss the latest challenges facing public pension funds in the United States. Despite a strong decade of market returns, many plans are failing to meet their targeted returns and are struggling with significant funding gaps. The conversation explores the systemic reasons behind these shortfalls, strategies employed by pension managers, and the broader impact on public workers and state budgets.

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Key Discussion Points & Insights

1. Public Pension Performance: Hits and Misses

• [03:09] Heather Gillers explains that while the past decade has generally been positive for public pensions, with annualized returns a little above 9%, this year's returns fell short:
  • Median expected return: 7.25%
  • Actual median return: 6.7%–6.8%
  • This shortfall reminds listeners that most pension plans "have much less in assets than they need to meet their future promises." — Heather Gillers [03:45]

2. Historical Context & Systemic Issues

• [04:09] The 2009 financial crisis took a major chunk out of pensions — about 20% drop in holdings.
• Governments in the 1980s and 1990s projected “rosy returns” and underfunded pensions based on those optimistic assumptions.
  • “Those [optimistic] returns… didn't arrive. And that's the cause of a lot of shortfalls in pension plans." — Heather Gillers [04:31]

3. Significance of Return Projections

• [04:52] The assumed rate of return directly impacts how much governments must contribute.
  • If investment returns lag, “the more money has to come from the government itself. And that money may need to be diverted from other public services like police or firefighters…” — Heather Gillers [05:09]
• Pension promises have strong legal protections, leaving governments obligated to fund the shortfall.
  • "In order to pay pensions, it must make up that difference. Yes.” — Heather Gillers [05:24]

4. Scale of the Issue

• Millions of Americans are affected — "police, firefighters, teachers, clerks, anyone who works for the government pretty much.” — Heather Gillers [05:35]

5. Alternative Investments: Experimental Results

• [05:48] To close funding gaps, many pension plans have turned to private equity, real estate, and other alternative investments.
  • This year, these alternatives "haven't always been the case" for better returns, and “this year was a really stark demonstration of that.”
  • Example: Wilshire’s hypothetical 60/40 stock-bond portfolio returned “over 9%”—outperforming the typical pension plan.
  • The Tampa Police and Fire Fund, “old school… only invests in stocks and bonds… returned a little over 8%, well above the median for large public plans.” — Heather Gillers [07:03]

6. Changing the Landscape of Pensions

• [07:23] Some governments are shifting to 401(k)-style defined contribution plans, especially for new hires (e.g., in Michigan).
• Many public sector workers, especially new teachers, receive “much less generous pensions than the older teachers that they're working alongside.”
• “The real liability, though, is to those older public workers, and there’s very little that most governments can do to change what they owe there.” — Heather Gillers [07:49]

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Notable Quotes & Memorable Moments

• “The annualized returns for the past 10 years are actually a little above 9%...but this year…they made about 6.7, 6.8%.” — Heather Gillers [03:15]
• “That projection determines how much governments have to pay in every year...the less money a plan can make in the market, the more money has to come from the government itself.” — Heather Gillers [04:58]
• “So Wilshire...did a hypothetical portfolio that was 60% domestic stocks, 40% domestic bonds, and it returned...over 9%, 200 basis points above what the median pension plan returned.” — Heather Gillers [06:32]
• “There have actually been a lot of changes to retirement benefits for new public workers. The real liability, though, is to those older public workers, and there's very little that most governments can do to change what they owe there.” — Heather Gillers [07:49]

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Important Timestamps

• 03:09: Heather Gillers introduces recent pension fund performance and historical returns
• 04:09: Systemic underfunding explained—optimistic return assumptions and market losses
• 04:52: Discussion on how return projections affect government pensions and budgets
• 05:48: The shift to alternative investments and recent data on asset allocation outcomes
• 07:23: Movement toward defined contribution plans and changes for new public-sector workers

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Conclusion

This episode underscores the persistent challenges facing U.S. public pension funds: missed return targets, systemic funding issues rooted in decades-old assumptions, and stalled efforts to solve the problem with riskier investments. As a result, millions of public sector employees face uncertain retirement outlooks, and state and local governments contend with difficult budget decisions and promises that can't easily be rewritten.

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For listeners who want to understand the complex balancing act behind public pension stability, this episode offers a clear, nuanced snapshot of the forces shaping retirement security for millions of Americans.

Transcript

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[J.R. Whalen]

Here's your money briefing. I'm J.R. whelan at the Wall Street Journal in New York. We have an update on the plight of public pensions coming up, some good news and some bad news. First, some money in market stories you should know. A new study from TD Ameritrade indicates that Generation Z, where people born after 1998 are considering not going to college or taking a different path. More than 3,000 U.S. teens and adults were surveyed, including about 1,000 from Generation Z, about 1,000 young millennials. Those are ages 22 to 28 and 1,000 parents ages 30 to 60. About 20% of the Generation Z and young millennials say not going to college is a serious option for them. And more than 30% of Generation Z and 18% of young millennials say say they plan to go to college but have given thought to taking a gap year between high school and college. One reason for the shift away from a traditional college education is student debt. The average borrower now leaves College with about $37,000 of loan debt. That's up more than $10,000 from a decade ago. And outstanding student debt owed by all borrowers reached $1.5 trillion in 2018. That's about triple the $600 billion owed by all borrowers just 10 years ago. And U.S. news and World Report gives Alaska Airlines the top spot in its survey of airline rewards programs. The site notes Alaska's broad range of award availability and its long list of routes to popular destinations. Delta SkyMiles ranked number two thanks to its high volume of daily flights and numerous rewards program member benefits for Delta and JetBlue, which took the number three spot. US News notes their programs don't have an expiration policy for accumulated points in miles. United and American rounded out the top five. And Southwest, by the way, at number six, was cited specifically for its perk of two free checked bags as part of its rapid rewards program. We've told you on a few occasions about the plight and challenges facing public pensions in the US Here on youn Money Briefing. And now word comes that Public pensions worth more than a billion dollars fell short of their projected returns this year. Wall Street Journal reporter Heather Gillers covers the pensions market and is here with more details. So Heather, the median return among pensions is the lowest since 2016.

[Heather Gillers]

The past decade has actually been pretty good for public pensions. It's the 10 years that ended June 30th is the first 10 year period in a while where we haven't had had a huge drag from the 2009 where we had haven't had a huge drag from the 2009 downturn. So the annualized returns for the past 10 years are actually a little above 9%. There have been five years of double digit returns in the past 10 years. But this year, yes, pensions had a median expectation of 7.25%. They made about 6.7, 6.8%. And it's a reminder that most pension plans, many pension plans around the US have much less in assets than they need to meet their future promises to retired police, firefighters, teachers, workers.

[J.R. Whalen]

Yeah, the bull market has been very good to pensions, but it just can't seem to outweigh the future obligations.

[Heather Gillers]

That's been a recurring theme and there are a couple reasons. One is the big chunk that was taken out of pensions assets in 2009, their holdings fell almost 20%. So there is a lot of catching up to do from that. But there are also more systemic reasons. Throughout the 80s and 90s, returns were very good. And those led governments to predict continuing rosy returns in the future and to put away only enough money as would be needed to fund pensions if those optimistic returns arrived and they didn't arrive. And that's the cause of a lot of shortfalls in pension plans.

[J.R. Whalen]

We mentioned the public pensions fell short of their projected returns. That projection is a very significant number

[Heather Gillers]

because that projection determines how much governments have to pay in every year to fund their pension plans. And the less money a plan can make in the market, the more money has to come from the government itself. And that money may need to be diverted from other public services like police or firefighters or the sew.

[J.R. Whalen]

So the government's obligated to make up that difference.

[Heather Gillers]

In order to pay pensions, it must make up that difference. Yes. And pensions have very strong legal protections in most states.

[J.R. Whalen]

And in discussing public pensions, we're not talking about a small number of people impacted.

[Heather Gillers]

No, we're talking about millions of people around the US Public workers, police, firefighters, teachers, clerks, you know, anyone who works for the government pretty much.

[J.R. Whalen]

And pension programs have been aware of this problem, which is to say shortcomings and challenges in investing for some time. And some of them have veered into what is described as alternative investments. But in a lot of cases, that hasn't really proven to be viable.

[Heather Gillers]

That was one of the more interesting data points that came out of this year's pension returns. As pensions have recognized their really serious shortfalls over the past decade, they've moved more into alternative investments, private equity, real estate, different kinds of vehicles that they hope will provide them higher returns than stocks and bonds after the fees and other costs related to these more sophisticated, complicated investments are netted out. That hasn't always been the case, and this year was a really stark demonstration of that. So Wilshire Trust Universe Comparison Service, who collects this data, did a hypothetical portfolio that was 60% domestic stocks, 40% domestic bonds, and it returned 9%, a little over 9%, 200 basis points above what the median pension plan returned. The Tampa Police and Fire Fund, which is a really traditional sort of old school pension plan, one manager, it's been managed by the same family firm for 45 years, only invests in stocks and bonds, never does alternatives. They that fund returned a little over 8%. So, you know, well above the median return for large public plans.

[J.R. Whalen]

You know, these financial struggles have been going on for so long. Will this be changing the landscape at all of public pensions going forward?

[Heather Gillers]

The landscape is definitely changing. There are governments that are moving to define contribution plans like 401ks that you see in the private sector. Michigan put a lot of its employees on 401s. Other governments have done that. There have been many reductions in pension benefits in a lot of, you know, police departments, fire departments, public schools around the country. Particularly in public schools around the country, you see new teachers coming in with much less generous pensions than the older teachers that they're working alongside. So there have actually been a lot of changes to retirement benefits for new public workers. The real liability, though, is to those older public workers, and there's very little that most governments can do to change what they owe there.

[J.R. Whalen]

All right, that's Wall Street Journal reporter Heather Gillers here in our studio. Heather, thanks for coming on the show.

[Heather Gillers]

Thanks for having me.

[J.R. Whalen]

And that's your money briefing. I'm JR Whalen in New York for the Wall Street Journal.

[Electronic Payments Coalition Representative]

This episode is brought to you by Charles Schwab. Decisions made in Washington can affect your portfolio every day. Washington Wise from Charles Schwab is an original podcast that unpacks the stories making news in Washington. [e-mail] WashingtonWise.