Almost no one wants to identify the subtle contradiction at the center of the pension controversy. In the widest sense, the funds are active. They write checks. They are cashed by retirees. Month after month, bus drivers in Helsinki, teachers in Ohio, and sanitation workers in New Jersey all receive what they were promised with the kind of unglamorous dependability that makes for awful headlines.
But for some reason, the same question keeps coming up in boardrooms, opinion pieces, and political campaigns. How can we alter them?
| Field | Details |
|---|---|
| Topic | Public & Private Pension Funds — sustainability and reform debate |
| Total US Public Pension Assets | Roughly $6 trillion under state and local management |
| Americans Covered by Public Plans | More than 20 million workers and retirees |
| Reported Funding Shortfall | $1.6 trillion (official) |
| Estimated Real Shortfall | Closer to $5.1 trillion, per Stanford research |
| Average Discount Rate (2022) | 6.7 percent — based on optimistic market projections |
| Actual 2022 Return on Pension Assets | Negative 3.2 percent |
| Alternative Investment Share (2001) | 14 percent of risky portfolio |
| Alternative Investment Share (2021) | Nearly 40 percent of risky portfolio |
| Notable Industry Voice | Suvi-Anne Siimes, outgoing CEO of TELA, Finland |
| Research Source | Hoover Institution & Harvard Business School Working Knowledge |
| Time Period Studied | Fiscal years 2014 to 2022 |
| Sample Coverage | 90 percent of US public pension assets |
Suvi-Anne Siimes, who will be leaving TELA this summer after fifteen years, expressed it in a way that resonated with me. Pension funds are “economically interesting creatures” with significant social implications, according to her. It sounds almost protective, almost gentle. You can understand why a former finance minister would say that about them as you stroll through Helsinki in late autumn. There, pensions are not a concept. They are the reason an elderly man can read a paper in a café at three in the afternoon without any problems.
Naturally, the American story is more complicated. For years, Joshua Rauh of Stanford has maintained that the official figures are inflated. A 75 percent funding ratio is claimed by public plans. Oliver Giesecke, Rauh’s colleague, believes the true number is more like fifty. Depending on how you calculate it, the difference is either $1.6 trillion or $5.1 trillion.
It’s not a tiny number either. Reading their work gives the impression that the math has become a kind of slow-moving fiction, with a 6.7 percent discount rate in a year when assets actually decreased by 3.2 percent. Risk-free promises are backed by risky assets. A first-year economics student could see the discrepancy.
However, this is the part that is overlooked. Checks continue to be sent out. Even under stress, the system hasn’t malfunctioned. The atmosphere surrounding it has changed.
Pension managers have subtly moved into private equity, real estate, and hedge funds over the last 20 years—what the industry refers to as alternatives. These accounted for 14% of the portfolio’s riskier end in 2001. Nearly forty by 2021. According to Harvard Business School’s Emil Siriwardane, this was more than just filling funding gaps. After being damaged by the dot-com bubble, some managers just started thinking that other options were superior. The belief was confirmed by consultants. It was further supported by peers. Consensus evolved from belief, and allocation resulted from consensus.
It’s difficult to ignore who gains from this drift. Fees that public equity firms never collected are collected by private equity firms. Consultants continue to be crucial. Politicians are able to postpone difficult discussions regarding contribution rates. In the meantime, the retiree has a commitment based on presumptions that might or might not hold up over the next ten years.
The drive to revamp these plans has an almost generational feel to it. Raised on individual accounts and quarterly statements, the 401(k) crowd finds defined benefit pensions odd because they are too quiet, too patient, and too collective. They are deemed out of date by critics. Siimes and other supporters refer to them as the long-term thinking that a society requires. The argument is so strong because both sides are partially correct.
As you watch this develop, you begin to question whether the true instability lies not in the funds themselves but rather in our tolerance for organizations that require fifty years to demonstrate their effectiveness. The purpose of pension funds was to make them dull. Boredom became intolerable at some point. Furthermore, reform frequently ends up meaning something completely different.
