Letter: Missouri teacher pensions becoming more risky
Risk — it is inherent in everything we do; and, in most circumstances, we get to control how much risk we are willing to take on. We can decide if we should buy that extended warranty on a new washer and dryer. We can decide whether to jaywalk or use the crosswalk. Even in investing for retirement, individuals decide how much risk they want in their portfolio. That is not the case, however, when it comes to public teacher pension systems. Indeed, unbeknownst to most, Missouri’s teacher pension systems have gradually shifted to riskier and riskier investments over the past 22 years.
In our latest paper, “Betting on the Big Returns: How Missouri Teacher Pension Plans Have Shifted to Riskier Assets,” we analyze annual reports from each of Missouri’s teacher pension systems. From 1992 to 2014, each of these systems has dramatically changed its investment strategy. For example, in 1992 the Public School Retirement System of Missouri, the state’s largest teacher retirement system, had more than 80 percent of its investments in low-risk assets, such as fixed-income securities and cash. That figure has steadily declined to just 24 percent in 2014. Meanwhile, PSRS and the other teacher retirement systems have increasingly invested in equities and alternative investments, such as real estate and commodities.
It is not inherently bad for a portfolio to take on more risk. High-risk investments are often accompanied by higher returns. Yet, there are three related problems that Missourians and state policymakers need to be aware of.
First, teacher pensions are guaranteed. For example, a teacher retiring from the Springfield School District this year with 30 years of experience could expect to receive roughly $45,000 a year, with cost-of-living adjustments, for the rest of her life, regardless of how long she lives. In a sense, her retirement benefits are risk free.
Second, current teacher and school district contributions to the pension system do not cover our existing obligations. We are taking in less than we are paying out. Which means pension plans must rely on investments in order to fund the promises we have already made to teachers.
Third, PSRS and the other pension systems assume an 8 percent return based on their investments. Instead, they should pursue a 4 percent risk-free rate, based on the fact that their obligations are guaranteed.
If these plans, with their increasingly risky assets, do not generate enough investment income, taxpayers may be left holding the bag.
Missouri’s teacher pension systems are relatively well-funded compared to systems in other states. Yet, the fundamental structures of the pension systems which have bankrupted Detroit and wreaked havoc in Illinois are one and the same.
Until we fundamentally change our teacher retirement systems, pension managers will likely continue to assume greater risk betting on the big returns. At the very least, fund managers can begin to provide better information to stakeholders, including investment return scenarios that aren’t as rosy as the ones currently used by plan actuaries.