New issue brief: “How Sensitive is Public Pension Funding to Investment Returns?”

The Center for Retirement Research at Boston College has released a new Issue in Brief:

“How Sensitive is Public Pension Funding to Investment Returns?”

by Alicia H. Munnell, Jean-Pierre Aubry, and Josh Hurwitz

The brief’s key findings are:

• To assess the sensitivity of pension funding to investment returns, the analysis projects funded ratios through 2042 for large public plans using:
  • a stochastic model of year-to-year returns; and
  • a median real return of 4.45 percent, the average used by plans in 2012.
• The baseline results show that the funded ratio for the 50th-percentile outcome does not reach 100 percent because:
  • plans pay only 80 percent of annual required contributions (ARC); and
  • amortization approaches produce inadequate contributions.
• Paying 100 percent of the ARC and using more robust funding approaches leads to near full funding by the end of the period.
• However, even under these more favorable scenarios, the variability of returns still poses risks of funding shortfalls.

This brief is available here.