Annual Public Funds Forum December 5, 2005

Abstract

Political incentives discourage interested parties—public officials and labor leaders—from acknowledging the magnitude of the public pension funding deficit. Consultants and actuaries, acting on the basis of accepted accounting principles and good-faith beliefs, effectively facilitate myths which disguise the severity of the problem. In real economic terms, the public pension shortfall appears to be in the range of $700 billion to $1 trillion. The public exposure of fund fiduciaries encourages an investment process geared toward herding behavior and reputational risk control under the guise of prudent investment management. Systems geared toward perceived safety and reputational risk avoidance may increase investment risk which is often highest when perceived to be lowest.

TOPICS: Pension funds, legal/regulatory/public policy, risk management