An Analysis of Risk-Taking Behavior for Public Defined Benefit Pension Plans
Policy research grant
The current pension funding gap for public employees through state-sponsored defined benefit (DB) plans causes concern. The effect of underfunded pension plans and the consequent risk-taking touch a large percentage of the population, including those at risk and the taxpayers who may be ultimately called upon to close the funding gap The severe funding gap prompts questions of why the underfunding occurred, and how the underfunding will affect state and local budgets, public employee retirement benefits, and employment security. A pertinent question is whether pension fund administrators will adopt riskier investment strategies in the hope of raising pension fund returns and lowering shortfalls, thus minimizing state pension contributions and reducing state budget gaps. In this research project, the authors focus on risk-taking behavior of public pension plans. In particular, the first comprehensive analysis of the determinants of public pension risk-taking behavior during the period 2001 through 2009 will be provided. Researchers will also investigate whether states reduced pension investment risk after the recent financial crisis. These results will have important policy relevance regarding public employee retirement benefit and job security, tax policies, state fiscal constraints, political influence, and public employee unionization, among other issues.