Modeling how public pension investments may perform over the next 30 years
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Data Visualization

Modeling how public pension investments may perform over the next 30 years

This tool runs a simulation of the investment performance of a hypothetical public pension portfolio over 30 years.

In the fiscal year 2020-21, most state and local public pension plans saw double-digit investment returns. State pension plans in Arkansas and Louisiana even reported investment returns exceeding 30%. Nationwide, the median rate of investment return for state pension plans for the last fiscal year was about 27%. Despite these record-setting figures, professional forecasts of future asset growth continue to provide a less than optimistic outlook for public pension plans’ long-term investment returns over the next few decades. A survey of these market projections shows investment returns are expected to average between 5.38% and 6.25% over the next 10-to-20 years for a hypothetical pension fund.

A Horizon Actuarial Services report released in Aug. 2021 surveyed firms like JPMorgan, BlackRock, and BNY Mellon to find that long-term investment returns are expected to decrease across the main asset classes that public pension plans invest in. The Horizon report states:

“Over the last five years, expected returns have declined for all but a few asset classes. The steepest declines have been for fixed income investments such as US corporate bonds and Treasuries, where return expectations have fallen more than 100 basis points since 2019. These declines were driven by recent monetary and fiscal policy interventions, and may have significant implications for multiemployer pension plans.”

Some public pension plans have made the prudent decision to reduce their investment return assumptions in light of this cautionary market outlook. Notably, the New York Common Retirement Fund lowered its assumed rate of return 90 basis points, which takes the assumed rate of return from 6.8% to 5.9%. This 5.9% expected return fits between Horizon’s 10- and 20-Year forecasts of 5.38% and 6.25%.

To get a better sense of the investment outlook for state pension plans, we created a tool that runs a simulation of the investment performance of a hypothetical public pension portfolio over 30 years. It displays the growth of $1 in assets; a distribution of the compound annual growth rate for those 30 years; and the simulation estimated probability of hitting several return assumptions.

The tool utilizes assumptions on asset returns, volatilities, and correlations pulled from BlackRock, BNY Mellon, Horizon Actuarial Services, JPMorgan, and Research Affiliates to simulate portfolio returns. Specifically, the model uses a Monte Carlo simulation with 10,000 simulations of the portfolio over 30 years. Users can select which capital market assumptions they want to run the model with. Additionally, users can select between the national average pension asset allocation, a 60/40 stock-bond portfolio, or a custom portfolio. Step-by-step directions on how to use the tool can be found below.

It is important to note that while this tool uses the latest assumptions from reputable financial advisors, they are still mere speculations on market performance. Additionally, while this approach for portfolio simulation is commonly used in the financial industry, it does not account for the time-variant nature of asset correlations. In times of financial stress, for example, assets can be more tightly correlated than they are in normal market conditions—aggravating portfolio losses. This was true during the Great Recession from December 2007 to June 2009 and could be true in a future crisis as well.

How to Use the Tool

  1. To run the portfolio simulation with the preloaded settings, simply hit the “Run Simulation” button in the top right.
  2. To modify the inputs, select the “Control Panel” button in the top left.
  3. The user can modify both the asset returns, volatilities, and correlations by firm (both Horizon’s 10-year and 20-year assumptions are included) via the “Capital Market Assumptions” dropdown.
  4. Asset allocation can be switched between the national average for state pension plans or a 60/40 stock-bond split. Additionally, asset allocation can be customized via the “Custom” button. Note that the portfolio must equal 100% to run the simulation.
  5. Once selections are completed, click “Run Simulation” to see the results.


  1. Assets: Displays the 25th percentile to 75th percentile (middle 50 percent of the data) of asset growth for $1 for the 10,000 simulations over 30 years.
  2. Distribution: Displays the distribution of compound annual growth rates for the 10,000 simulations over 30 years. Opposed to the arithmetic return, the compound annual growth rate (or geometric return) better represents the long-run growth of an asset. Also displayed are two lines: (1) the median simulation return and (2) where 7% return sits in the distribution which is often used as the assumed rate of return for public pension plans.
  3. Return Probability: Displays the probability of the portfolio reaching various assumed rates of return given the results of the 10,000 simulations.

Stay in Touch with Our Pension Experts

Reason Foundation’s Pension Integrity Project has helped policymakers in states like Arizona, Colorado, Michigan, and Montana implement substantive pension reforms. Our monthly newsletter highlights the latest actuarial analysis and policy insights from our team.

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