Andrew Biggs writes in the Wall Street Journal about how defined benefit pension funds are taking bigger and bigger portfolio risks. These plans (mostly government employee pensions) were created using an assumption that portfolios would return around 8% annually. This certainly hasn't been the case, and is not likely to in the near future. One option would be for government to raise taxes to increase its contributions to the pensions. This is somewhere between unlikely and impossible. The only alternative for these funds is shift investments into much riskier assets in search of a higher returns.
A more prudent move would be for governments to convert pensions into defined contribution plans -- as almost the entire private sector has done. But given that most governments are controlled by public employee unions, that's not likely either. Historically, investment strategies that greatly expand risk have very unhappy endings. It may be that's what it will take to get government to face reality. Unfortunately that means that there are probably a lot more Detroit scenarios on the horizon.
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