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Stock Market Investing: Good Enough for Public Employee and Union Pension Funds

4 min readBy: Curtis S. Dubay, Scott Hodge

Download Public Employee and Union Pension Funds Commonly Invest in Stock Market Investments

Fiscal Fact No. 19

The debate over allowing younger workers to invest a portion of their Social Security payroll taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. es in personal retirement accounts has become increasingly politicized, with some groups charging that the plan will amount to “gambling” in the stock market and giving billions in Social Security dollars to Wall Street pension fund managers.

For example a recent series of television ads sponsored by the AARP depict a middle-aged man and woman saying, “If we feel like gambling, we’ll play the slots…There are places in retirement planning for risk. Social Security isn’t one of them.” The AFL-CIO’s website features member testimonies such as, “I am opposed to private investment as an alternative to Social Security because the stock market is too unstable.” A 2004 resolution by the American Federation of State, County and Municipal Employees (AFSCME) says, “AFSCME has long opposed diverting Social Security payroll contributions…to fund risky retirement investment accounts.”

Despite these harsh attacks, in reality pension fund investing is anything but a political exercise. Fund managers have a fiduciary responsibility to maximize the rate of return on the fund’s investments by carefully balancing short-term and long-term risk in order to assure enough assets to pay future retirement benefits.

Some of the largest pension funds in America today are public employee and union pension funds. Most of these funds are managed on a contract basis by private investment houses such as Alliance Capital, Goldman Sachs, Morgan Stanley, and Solomon Smith Barney. Very few are managed in-house.

According to the Federal Reserve Board, public employee pension plans alone had nearly $2 trillion in assets as of September 2004. Overall, 54.8 percent of these assets were invested in corporate equities, 36.1 percent were invested in fixed income instruments (such as corporate and foreign bonds), with the remaining funds in cash or other investments.

Like most Americans, each fund has its own philosophy on how its assets should be balanced between corporate equities, fixed investments, and cash. The table below displays the asset balances for the 40 largest public employee and union pensions in the country, with combined assets of $1.7 trillion at the end of 2004 according to Pensions and Investments magazine (

On average, public employee pension funds have 60 percent of their assets invested in the stock market, including roughly 15 percent in foreign stock markets. Union pension funds have a slightly smaller share of their assets in the stock market, 57 percent.

The largest pension fund in the nation (private or public) is the California Public Employees Retirement System (CALPERS), which has 61 percent of its assets in stocks, including 21 percent in foreign stocks. The funds most heavily invested in stocks are the New York City Retirement Systems (70 percent), the New York City Teachers Retirement System (78 percent) and the Teamsters Central States fund (72 percent). The fund with the smallest share of its assets in stocks is the South Carolina Retirement System, which has 39 percent of its assets in stocks.

These public employee pension funds are all defined benefit plans. The largest defined contribution plan in the Nation is the federal employee Thrift Savings Plan—government worker’s version of a 401(k). TSP has roughly 3.3 million participants and more than $140 billion in assets. Federal employees can choose among five funds, three of which are stock funds, all managed by the San Francisco firm Barclays Global Investors. TSP has been mentioned as a possible model for a personal retirement account system for Social Security.

In fact the federal law governing pension funds—the Employee Retirement Income Security Act (ERISA)—actually mandates that pension fund managers diversify their investments in order to minimize the risk of large losses. (For more on ERISA and fiduciary responsibility click here.)

As most Americans are now becoming aware, the Social Security “Trust Fund” is not a diversified portfolio but is invested in government IOUs, rather than real assets that will grow in value to pay future benefits. Pension funds, however, cannot deliver benefits to future retirees unless they are invested in real assets that grow in value over time. That is why millions of public employees and union members owe their retirement security to the prudent investment of their pension funds in domestic and foreign stock markets. The success of these funds should put to rest the hysterical charges of critics of personal retirement accounts.