US public pension funds often sell stocks to meet cash needs even when markets are falling, according to October research that questions the assumption that long investment horizons make them dependable buyers during downturns.
The study estimates that negative cash-flow shocks were associated with about 67 cents of equity sales for each dollar of shock. The result concerns deviations from estimated contribution and benefit trends, not a fixed rule for how every pension payment is financed.
Aleksandar Andonov, Kristy A. E. Jansen and Joshua Rauh examine the pattern in an NBER working paper issued in October. It is preliminary research and has not been peer-reviewed.
A long horizon does not remove today’s bills
A pension fund invests money to finance retirement benefits. Its obligations can extend for decades, but some of those benefits have to be paid this month.
The researchers define operating cash flow as contributions minus benefit payments and administrative spending, measured relative to assets. Investment returns are separate from that calculation.
Operating cash flow can be negative when the money arriving from employers and workers is smaller than the amount leaving. A mature scheme with many retirees may expect that pattern and plan to use investment income or asset sales to make up the difference.
For example, a fund with $100 million of annual outgoings and $80 million of contributions needs another $20 million in cash. A rise in the market value of its investments does not, by itself, put that cash into the payment account.
Nor does negative operating cash flow alone establish that a pension plan is insolvent. The National Association of State Retirement Administrators makes that point in its Public Fund Survey. Long-term funding depends on assets, contributions, investment performance and the benefits promised, as well as the timing of payments.
Limited buffers change which assets are sold
The study’s aggregate records cover 186 public pension funds from 2001 to 2023, representing 93% of US state and local pension assets. More detailed holdings data cover 65 funds, accounting for approximately 44% of those assets.
Funds with more negative operating cash flows did not systematically set higher target allocations to safe, liquid assets. In the detailed holdings data, cash and US Treasury securities averaged only about 10% of assets.
Liquidity describes how readily an asset can be turned into usable cash. A portfolio can hold substantial wealth while having limited money immediately available for payments.
Listed shares can usually be sold more readily than a stake in a private investment partnership or a building. That availability can make stocks a source of cash even when selling is unattractive at the prevailing price.
The authors found stock sales during periods of negative equity returns too. They interpret the pattern as reflecting payment needs, rather than simply rebalancing portfolios after stocks rise in value.
Cash management and return targets pull in different directions
Holding more cash or safe assets can reduce the need to sell other investments on short notice. It can also mean giving up expected returns available from riskier assets.
A fund therefore faces a choice about how much ready cash to hold and how much to invest for longer-term growth. The paper discusses incentives that may favor keeping money invested, but does not establish that one allocation is best for every scheme.
Our reporting on private credit and company financing describes another part of this relationship. An asset that supplies long-term funding to a borrower is not necessarily easy for its investor to sell when cash is needed.
The market effect remains an open question
The findings concern US public pension funds and historical observations ending in 2023. They cannot automatically describe private pension plans or retirement systems in other countries.
The estimates also do not measure how much pension-fund selling moves the entire stock market. Identifying sales motivated by cash needs is different from establishing their effect on prices.
For markets, the research weakens a convenient assumption: that an investor with decades of future obligations can always wait out a decline. Its willingness to wait may be constrained by payments due long before those decades have passed.
