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Risky Business: Hoping High Returns Fund The Pension Gap

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In order to keep taxes low and prevent cuts to services, state politicians effectively borrow massive amounts of money from their pension systems and make risky investments to offset the budget shortfalls. They claim that there are no budget shortfalls as long as investment returns remain high. When investment returns don’t materialize, they turn to taxpayers to pick up the shortfall.

Be sure to read “Hidden Debt, Hidden Deficits: 2017 Edition,”  in which Joshua D. Rauh details the issues surrounding the pension system and the role of governments in increasing liabilities and deficits by means of their pension system.

Discussion Questions

  1. Despite knowing the risks, why do state politicians and actuaries continue to use high expected rates of return?
  2. What happens if investment returns are not achieved?
  3. Why do the governments ignore the risks in their budgeting for pension obligations?