Retired public sector employees often rely on government pensions to support them instead of employer sponsored 401(k)s. Traditionally, these funds have been tied up in low risk investments, but with fluctuating interest rates and a volatile market, pension managers have been taking on more risk to generate higher returns. If something isn't done, these public pensions may see themselves in a Social Security-esque situation in which current workers are bankrolling retirees.
In an interview with CNBC, Steve LeBlanc, former managing director of the Texas Teachers' Fund said that most public pensions have been moving away from the traditional 60-40 stock-bond allocation ratio. To meet obligations, under-funded pensions have moved their money into private equity and real estate. LeBlanc added that if pensions refuse to take on more risk, they will never be able to meet the returns to pay retirees and cover the fund's general operating costs.
One way that states and municipalities could get around taking on more risk is to raise taxes. Politicians know, however, that putting the bill on citizens – most of whom work in the private sector – would most likely result in them being booted out of office.
"We're not going to be able to honor all the commitments we have made with all the teachers and firemen and policemen unless we get higher rates of return," Dave Rubenstein, co-founder of the private equity firm the Carlyle Group, told CNBC. "If we were to tax people more we wouldn't have to do this. But we don't want to tax people to pay for these benefits."
If you don't want you retirement income to be invested at the whims of a pension manager, maybe it's time to pursue some alternative wealth preservation strategies.