Amid higher inflation and more retirements, public pensions are strapped for cash.
Since COVID-19 and the lockdown-induced recession, the inflation rate has risen to 6.2% — the highest level since 1990. Meanwhile, more Americans are retiring — contributing to the labor force participation rate reaching its lowest level since the 1970s.
According to a report from The Wall Street Journal, both trends are pushing pension funds to take steps that ensure their continued liquidity:
Cash allocations have dropped to a seven-year low at the funds that manage more than $4.5 trillion in retirement savings for America’s teachers, police and firefighters. Public pension funds, which have increasingly turned to illiquid private markets to drive up returns, are now aiming to keep about 0.8% of their holdings in cash, according to data from the Boston College Center for Retirement Research. These funds are managing a juggling act faced by many institutional and household investors who want to put their money to work but also want easy access to it in a pinch.
The Journal adds that retirements may be poised to surge further:
Public pension funds have hundreds of billions of dollars less on hand than the amount they will need to cover promised benefits after two decades of underfunding, unrealistic demands from public-employee unions, and losses during the 2007-2009 financial crisis.
Over the same period, their cash-flow margins have thinned as retirees have multiplied relative to the number of current workers. In Connecticut, for example, more than a quarter of the state workforce are eligible to retire between June 2020 and June 2022, Boston Consulting Group found.
The average public pension fund wants to keep 0.8% of holdings in cash.
Many economists point to higher amounts of federal education, healthcare, and unemployment aid as a contributing factor to labor shortages. Congress has funded nearly $5 trillion in stimulus spending since March 2020; meanwhile, President Biden recently signed a $1.2 infrastructure package, and lawmakers are considering a $1.75 trillion social spending package entitled the “Build Back Better Act.”
In an interview with The Daily Wire, Rep. Kevin Brady (R-TX) — the Ranking Member of the House Ways and Means Committee, which is responsible for deliberating fiscal policy matters — explained that President Biden’s American Rescue Plan crushed “Main Street businesses” through its $300-per-week enhanced unemployment payments.
“It’s certainly slowing our recovery and contributing to both slower deliveries and higher prices all up and down the supply chain,” he said. “Companies of all sizes simply can’t find the workers they need, whether they’re retailers, restaurateurs, or production lines — this is inevitable when you pay four out of ten Americans more to stay home than to work.”
According to Brady, the child tax credit introduces similar distortions.
“For the first time, it is divorced from work. That’s not a requirement for getting it, and so you’re seeing this barrier begin to impact businesses starting last week,” Brady said. “I think the point here is that the federal government is sending a seemingly never-ending supply of checks, regardless of whether you work or not. You’re going to have economic problems, and that’s what we’re seeing.”