The current financial crisis brings renewed attention to the issue of retirement security.  Today, employees and retirees alike are watching their 401(k) savings plans shrivel as the financial markets continue to plummet.

Meanwhile, beneficiaries of public pensions learn that the performance of their retirement plans are not immune to financial market volatility.

Investment losses in public pension plans, if they persist, may have to be made up with additional contributions from employers and (in some cases) employees and taxpayers.  That’s why taxpayers and employees alike have legitimate concerns about future commitments required to ensure the long-term integrity of public pensions.

So how do pubic pensions react to market ups and downs?  Using economic tools and government data, this report finds that public pension plans:

• Exhibit prudent investment behavior by regularly rebalancing their portfolios;
• Adopt best investment practices of industry leaders, another prudent practice;
• Avoid moral hazard.  Public pensions may have been overly cautious in some cases;
• Avoid employer conflicts.  Public pensions tend to hold smaller amounts of stocks when employers face higher contributions.