Risky Investments Hurt Alabama Pension Program

In "The truth behind the big money efforts to change pensions in Alabama," (August 1 "Guest Voices) Tom Krebs makes two excellent points: Public sector employees deserve a secure retirement, and risky investments are no way to guarantee Alabama's pension holders what they've earned.

I agree with Mr. Krebs. Indeed, my research on Alabama's pension situation drives these points home. Importantly, another lesson of finance – don't value a guaranteed pension based on risky assets – continues to elude the Retirement Systems of Alabama, with predictable results.

Mr. Krebs cites numbers showing the pension plans are doing well, but recent returns suggest otherwise. According to the RSA's audited report in 2015, "a poor finish to the fourth fiscal quarter wiped out decent gains," returning only 1.04 percent, 1.05 percent and -0.54 percent for the three plans—well below RSA's annual target of 8 percent.

Returns over the last ten years have also fallen short at between 5.16 percent and 6.1 percent, reflecting the volatility of the RSA's investments.

When investment returns aren't enough, who foots the bill? Of the $2.26 billion in TRS revenues in 2015, only a sliver came from investment income while 83 percent came from the pockets of Alabama employees and their employers. 

One important correction: Mr. Krebs implies that the Mercatus Center does directed research. That is not the case. Our research is independent, peer-reviewed, and held to the highest standards of academic excellence.

Public policy research should generate thoughtful discussion. We are always happy to be part of such conversations.