America’s Public Pension Challenges Can Be Fixed. Canada Is Proof.

Ingo Walter
By Ingo Walter and Clive Lipshitz
There are about 5,300 public pension funds in the U.S. today, overseeing some $4 trillion in assets. The 25 largest account for more than half the total. The rest of the market is highly fragmented, with thousands of public pension portfolios managed independently and locally. Fragmentation results in less efficient portfolios and higher operating costs, potentially leading to lower net returns and ultimately a greater funding burden on taxpayers. Especially given the impact of Covid-19 on public finances, there must be a better way.

In a comparative study of the largest U.S. and Canadian public pension plans, we explored pension reform in Canada in the late 1980s and 1990s. Prior to those reforms, Canadian policymakers worried about the integrity of the country’s public pension system. Decades later, the system is considered among the best in the world. Our data show that on almost all metrics the Canadians outperform their U.S. peers, so the Canadian experience offers some useful lessons for reforming the American public pension system.

One of the key lessons is that scale matters, and there are ways to achieve scale even for smaller pension funds through the pooling of assets. We call this the consortium model of pension system design.

Read the full Institutional Investor article.

Ingo Walter is a Professor of Finance Emeritus at New York University Stern School of Business.