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TESS VIGELAND: So we really have ourselves to blame for losses in our 401(k)s and IRAs. But when it comes to pensions? Well, those are managed by supposed professionals. Yet a recent PricewaterhouseCoopers analysis found the average government pension fund will have less than half the money it needs for retirees by the year 2025. Turns out pension managers poured workers' cash into risky investments. Much of it washed away in a sea of subprime slime. Now some of those same managers say the only way to meet their obligations is to jump back into the same waters.
Marketplace's Nancy Marshall Genzer explains.
Nancy Marshall Genzer: Government workers held their breath as they watched a drumbeat of bad news roll across their TV screens last year.
Newscasts: We haven't seen anything like this, probably since the Great Depression. What started in America last year has now spread to the entire world. Stocks are set to kick off lower, a whole lot lower.
Government workers watched as their pension funds lost about a trillion dollars, according to the Center for Retirement Research at Boston College. Now, some funds are turning back to risky investments with the potential for big payoffs. Investments like securities backed by mortgages that got us into trouble in the first place.
Ralph White: I think anyone would be crazy to even consider investing in mortgage-backed securities at this time in view of what happened took place last year.
That's Ralph White. He's a retired Massachusetts parole officer. White worries about the health of the state pension fund.
On the other side of the country, Cathy Hackett is also concerned. She's a budget analyst in the California transportation department. She's 60, thinking about retirement. Hackett is so worried about pensions she's running for a seat on the board of CalPERS, California's $200 billion pension fund. Hackett is also a union shop steward. She hears this a lot from the rank and file, worried about their pension money:
Cathy Hackett: "Will it be there when I retire?"
Hackett tells them CalPERS is making reasonable investments, but the union is keeping an eye on them. And CalPERS isn't shying away from risk. CALPERS spokeswoman Pat Macht says it's now looking for bargains in commercial real estate.
Pat Macht: There are some now that you can buy at a fire sale and if we think they have good underlying economics then we might invest in them.
Macht says CalPERS is reviewing its investments in light of the $50 billion it lost in the last fiscal year. Government pension funds across the country lost money and now many are under-funded.
Alan Biller: There's a big time bomb out there.
Consultant Alan Biller is trying to defuse that bomb. He's advising pension fund boards not to make overly risky investments they think will pay off big as cities and counties slash contributions to the funds.
Biller: Puerto Rico was a classic case. Puerto Rico's pension plan was an outright disaster. New Jersey's plan has been woefully underfunded. There are lots of plans like that. We're talking hundreds of billions, I would say.
But Timothy Firestine says stodgy stocks and bonds just don't cut it anymore. He's chief administrative officer for Montgomery County, Md. He says fund managers have to take some risk to generate enough pension money.
Timothy Firestine: If you totally ignore an investment category you might also miss an opportunity.
But Firestine says investing isn't the only way funds can make up for their losses. Some states require workers to contribute to their retirement benefits. States can also encourage workers to delay retirement. Their last resort? You.
Consultant Alan Biller.
Biller: Ultimately, the taxpayers will foot the bill. So, in the sense that public plans have generally taxing power, they have something to fall back on.
And a fall back option may well be needed. Some state constitutions guarantee retiree benefits, so whether the money is there or not, it'll have to be paid out.
In Washington, I'm Nancy Marshall Genzer for Marketplace Money.