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Decent investment returns are vital if pensions are to be paid in full. According to NASRA, the total revenues—the money needed to pay benefits—of American public-sector pension funds have been $5.9 trillion since 1984. Of this, employers have contributed $1.5 trillion and employees $730 billion. The vast bulk—$3.7 trillion—came from investment returns.

Yet states and local governments are not putting away enough to pay pensions, even assuming their optimistic assumptions about returns are met. The last year funds made the full contribution required by their plans was 2001. They have fallen short by 10% or more in every year since 2008. As a result, the Centre for Retirement Research (CRR) estimates that the average state and local pension plan was 74% funded at the end of last year—down from fully funded in 2001. That equates to a deficit of $1 trillion or so. As the hole gets bigger, higher future contributions are needed. They have risen from 6.7% of payroll in 2001 to 18.6% now.

The realistic solutions to this mess are bigger contributions from employers (higher taxes, in other words), higher contributions from employees (pay cuts) or reduced benefits. But many pension funds seem to hope they can make up the shortfall in returns by investing in alternative assets (property, private equity and hedge funds). A survey by Towers Watson, an actuary, showed that alternative assets as a proportion of American pension portfolios (public and private) rose from 16% in 2004 to 29% in 2014.  

Economist