Aaron Brown, Columnist

Reforms May Be the Downfall of Pension Funds

Retirement systems reduced their exposure to equities at the worst possible time.

January 31, 2020 at 1:00 PM UTC

Aaron Brown is a former head of financial market research at AQR Capital Management. He is also an active crypto investor, and has venture capital investments and advisory ties with crypto firms. He is the author of the soon-to-be-released "Wrong Number."

Public workers may see their pensions hit hard in the next recession.
Photographer: David McNew/Getty Images

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The shock of U.S. state and local pension fund losses in 2008 led to a flurry of reforms. These may not have actually improved aggregate funding ratios, but they did stop the decline. However, we should remember Alexis de Tocqueville’s maxim, “experience teaches that the most dangerous time for a bad government is usually when it begins to reform.” In the next recession, the reforms of 2008 – 2016 may prove the undoing of a system that has staggered along for decades.

Of course, this might not happen. The next recession could be mild, or perhaps the current system will prove resilient. It would still be very painful, of course, to public sector workers, government creditors and taxpayers, but alternative ways of resolving underfunded pension funds might be more painful. So while there are no clear solutions, it’s plausible enough that we should start making contingency plans if a collapse occurs.