Opinion: Missouri teacher pension systems becoming risky investments

Risk. It is inherent in everything we do, and in most circumstances, we get to control how much risk we are willing to take on.

We can decide if we should buy that extended warranty on a new washer or dryer. We can decide to jaywalk or use the crosswalk. Even in investing for retirement, individuals decide how much risk they want in their portfolio.

That is not the case, however, when it comes to public teacher pension systems. Indeed, unbeknownst to most, Missouri’s teacher pension systems have gradually shifted to riskier and riskier investments over the past 22 years.

From 1992 to 2014, each of Missouri’s teacher pension systems has dramatically changed its investment strategy.

For example, in 1992, the Public School Retirement System of Missouri, the state’s largest teacher retirement system, had more than 80 percent of its investments in low-risk assets, such as fixed-income securities and cash. That figure has steadily declined to just 24 percent in 2014. Meanwhile, PSRS and the other teacher retirement systems have increasingly invested in equities and alternative investments, such as real estate and commodities.

It is not inherently bad for a portfolio to take on more risk. High-risk investments often are accompanied by higher returns. Yet, there are three related problems Missourians and state policymakers need to be aware of.

First, teacher pensions are guaranteed. For example, a teacher retiring from Springfield Public Schools this year with 30 years of experience could expect to receive roughly $45,000 a year, with cost-of-living adjustments, for the rest of his life, regardless of how long he lives. In a sense, his retirement benefits are risk-free.

Second, current teacher and school district contributions to the pension system do not cover our existing obligations.

We are taking in less than we are paying out. That means pension plans must rely on investments in order to fund the promises we already have made to teachers.

Third, PSRS and the other pension systems assume an 8 percent return based on their investments.

Instead, they should pursue a 4 percent risk-free rate, based on the fact their obligations are guaranteed.

If these plans, with their increasingly risky assets, do not generate enough investment income, taxpayers may be left holding the bag.

Missouri’s teacher pension systems are relatively well funded, compared to systems in other states. Yet, the fundamental structures of the pension systems that have bankrupted Detroit and wreaked havoc in Illinois are one in the same.

Until we fundamentally change our teacher retirement systems, pension managers will likely continue to assume greater risk betting on the big returns.

At the very least, fund managers can begin to provide better information to stakeholders, including investment return scenarios that aren’t as rosy as the ones currently used by plan actuaries.

Michael Rathbone is a policy researcher at the Show-Me Institute. Distinguished fellow James V. Shuls, Ph.D., and an assistant professor of educational leadership and policy studies at the University of Missouri-St. Louis, contributed.