As we begin the new year, many of us take stock of our financial situation. Public pension systems should as well. Retired police, firefighters and teachers deserve better than what the bureaucrats managing their money have delivered.
In the latest issue of the Retirement Systems of Alabama (RSA) Advisor newsletter, CEO David Bronner defends the fund against proposed reforms that would empower public employees, rather than centralized bureaucracies, to manage their own retirement accounts.
While the RSA is the immediate focus, its investment performance is emblematic of a broader, well-documented pattern across public pension systems nationwide: investments consistently underperform passive benchmarks and assume optimistic return expectations that strain retirees and taxpayers.
According to a nationwide pension solvency and performance report, the median investment return for public pension plans in 2024 was 9.88 percent, which came in above many funds’ assumed rate of returns (the national average is 6.87 percent).
The RSA newsletter highlighted similar results for FY 2025, ending September 30th. The Teachers’ Retirement System (TRS) posting a 10.16% return, the Employees’ Retirement System (ERS) at 10.40%, and the Judicial Retirement Fund at 10.37%. These certainly, and thankfully, beat the RSA’s assumed rates of returns for these funds.
One sparrow, however, does not a spring make. Public pensions were promised to provide stable, predictable retirement income for public servants at an affordable price for taxpayers. Instead, they exhibit high volatility in investment returns, complicating long-term planning and funding.
A 24-year average of investment returns shows that public pension investments consistently fall short of assumed rates of return. The gap between assumed and actual rates of return have only narrowed because investment return assumptions were lowered to more closely match actual rates.
Still, a gap between assumed and actual returns persists and this has real-world consequences. Pension systems nationwide often base actuarial liabilities, contribution rates, and benefit promise on assumed returns that exceed what markets have delivered over decades. When assumptions outpace actual experience, unfunded liabilities grow and taxpayers are left to cover the difference.
These unfunded liabilities total over a trillion dollars nationwide. Alabama’s own system faces roughly $22 billion in unfunded liabilities despite great investment performance year. In the event of a market downturn, these unfunded liabilities could greatly increase and expand the burden on taxpayers significantly.
Benchmarking reinforces the depth of the problem. Over the matching timeframe, the S&P 500 posted a stronger 17.16% total return. That's a gap of 7 percentage points for Alabama. This, however, is not unique. Nationwide, all public pension systems underperformed compared to the S&P 500 over the past 20 years.
Even a diversified balanced portfolio (60% S&P 500 equities and 40% S&P 500 Bond Index fixed income) would have returned over 12%, readily outperforming 84 percent of public pensions, including the RSA. Public employees and retirees could have fared better with low-cost index-tracking individual accounts rather than RSA's active management.
Public pensions nationwide have ramped up their asset allocations to equities, private placements, and alternatives to pursue higher yields, yet consistently trail passive benchmarks. This is because some pension funds (including the RSA) use investments for economic development and industrial recruitment, putting taxpayers and retirees at greater risk.
Worse, states such as California, Illinois, Massachusetts, and New York continue to use pension funds on political crusades like Environmental, Social, and Governance (ESG) campaigns, which further jeopardize retirees and taxpayers. When retirement plans are pressed into service for political goals, workers shoulder the investment and longevity risk while taxpayers face higher contribution requirements when those investments fall short of expectations.
For public employees, individual retirement accounts offer clearer ownership, portability across jobs, and access to diversified passive investment options that have historically delivered competitive returns with substantially lower fees and complexity. Instead, traditional pension systems across the country continue to depend upon unrealistic assumptions and active management that have failed to deliver consistent, risk-adjusted performance.
Reform proposals that expand individual control over retirement savings would modernize public retirement systems, better align incentives, and reduce bureaucratic power over massive pools of other people’s money. The only real losers would be entrenched interests who benefit from maintaining the status quo.
Daniel J. Smith is the Director of the Political Economy Research Institute and Associate Professor of Economics in the Jones College of Business at Middle Tennessee State University.
Thomas Savidge is a Research Fellow at the American Institute for Economic Research. Follow him on X:@thomas_savidge.
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