How high interest rates impact public pension systems

In Politics by Michael Rae

The interest rate pendulum plays a well-known role in public pension funding. Traditionally, high-interest-rate periods are celebrated for reducing the need to hold riskier investments, offering instead the security of stable returns in fixed-income markets. On the other hand, low-interest-rate environments often compel funds to seek higher investment returns outside fixed income by taking more risk, a practice called “gambling from redemption,” to borrow a term from fiscal policy.  

The past decade of near-zero interest rates drove many public pension funds to seek higher-yielding investments. These alternative investments, such as private equity, real estate, high-yield credit, and emerging markets, now comprise