When public pensioners nationwide recently were surveyed about their government-run pensions, six out of 10 believed their retirement "lockbox" was fully funded. Yet recent research shows that view diverges from reality.
According to Pew Trust research, only 70% of state pension liabilities are funded, and this statistic assumes generous fund returns in the years ahead. More realistic calculations show our nation's public employees face a devastating situation. Unfortunately, some public leaders in U.S. cities and states are playing politics with retirees' savings rather than responsibly addressing fiscal imbalances.
In various cities and states across the U.S., elected officials have spearheaded efforts for government pension funds to divest from companies involved in fossil-fuel production (oil, coal, gas, etc.). New York City Mayor Bill de Blasio and Comptroller Scott Stringer recently announced the city's pension funds will sell up to $5 billion of public pension investments in the oil-and-gas industry — not because of poor returns, but because of environmental concerns. Likewise in 2017, Seattle Mayor Ed Murray asked the Seattle City Employees' Retirement System board to divest holdings in "companies whose primary business is the mining or burning of coal." Similar divestment efforts have been pushed by officials in California and Washington, D.C.
By putting politics over pensioners, politicians threaten to make already precarious pension systems worse off. Returns from recent years show that politically motivated investing has seriously underperformed.
Take New York City as an example. According to a recent report, 12% of the city pension funds' 2017 investments were in so-called developed environmental activist assets. Despite this undefined asset class "underperform(ing) the overall funds' returns by an average of 600 basis points over the last three calendar years," fund investments in this asset class increased over the past three years. Likewise, the report finds that of the 154 private equity fund investments held by the city's second largest pension fund, the New York City Employees' Retirement System, three of the 10 worst performing in 2017 were focused on so-called renewable energy efforts. None of these socially oriented investments was among its top 10 performers.
In other words, divestment will make it harder for public-sector workers to collect the pensions they expect.
Pension funds must invest long-term to meet the anticipated needs of retirees. Every dollar counts, and long-term growth is essential, especially because markets do not always go up. Managing other people's money is not a trivial pursuit — it demands prudence, patience and perception, not political gamesmanship.
Fortunately, public-sector workers and pension system boards are pushing back against reckless politicians. In New York City, the police pension board recently rejected Messrs. de Blasio's and Stringer's fossil-fuel divestment proposal, the firefighter pension board tabled it, and the three other major city pension funds have agreed to study the issue, rather than divest outright.