Pension funds for state and municipal workers in Massachusetts should lower their annual investment return projections to more realistic levels, according to a research paper by the Pioneer Institute scheduled to be released Wednesday.
Currently, the Commonwealth’s 105 pension boards have annual targets for investment returns ranging from 7.5 to 8.5 percent, according to the institute, a nonpartisan research group in Boston. But if returns over time continue to come in well below that, the pension boards will have more trouble finding money to pay the retirement benefits of their workers.
Already, the 105 boards are about $31 billion short of the money they will need to pay all their pension obligations. Unless the boards can make up for that shortfall with investment results, the state and local governments will have to step in with additional funds.
That could mean a big bill for taxpayers, something states around the country are worried about, as pension payments are projected to balloon over the next couple of decades. Still, said Jim Stergios, Pioneer’s executive director, “The state needs to work from the most realistic investment assumptions.”
Lowering target investment rates will almost certainly mean more pressure on the state to find another way to solve the shortfall in pension funding, either by providing more taxpayer funds to to the retirement plans or trimming benefits.
Treasurer Steve Grossman, who is chairman of the pension board for the state’s $50 billion fund, has called for a reduction in the state’s target return rate from 8.25 percent to 8 percent. Stergios applauded the step but said the rate should come down further. Lowering the rate to at least 7.5 percent, Stergios said, would be “a very prudent step to take right now.”
The state fund’s return was roughly zero for the fiscal year ended June 30.
Under current return assumptions, the state’s payments to cover unfunded liabilities will increase from around $1 billion last year to about $3.2 billion in 2040. And unless investment returns increase dramatically, the state may have to come up with much more. But returns have, in fact, been decreasing due to volatile markets.
“We’re not trying to say that there’s a time bomb. It’s that we ought to be prudent about what a realistic number is,’’ Stergios said.
The California Public Employees’ Retirement System, the nation’s largest public pension fund, this year lowered its target rate to 7.5 percent from 7.75 percent. Meanwhile, its investment return for the fiscal year ended June 30 was 1 percent.