The awful outlook for public pension funds is the subject of this weekend story in the Washington Post, helpfully linked by Andrew Biggs of the American Enterprise Institute.

Money graf from the Post account:

Even if public pension funds were to hit their 8 percent investment targets every year, [Kim Nicholl, the national director of PricewaterhouseCoopers public sector retirement practice] calculated they would have less than half of what they need by 2025. This is because a greater share of the population will be retired and those who are will live longer, thus collecting benefits longer, she said.

But how likely is it that public pension funds like New York’s will actually earn their 8 percent target rate of return?  Biggs runs the numbers:

Imagine that a public pension fund invested $315,000 in assets with an expected return of 8 percent and a standard deviation of returns of 13 percent. Using a Monte Carlo simulation we can check how often this portfolio is likely to exceed $1,000,000 in 15 years time. The answer is a little over 40 percent, meaning that there’s an almost 60 percent likelihood that even a “fully funded” public pension plan won’t be able to meet its obligations.