Lawmakers are willing to anger taxpayers and retirees to show investors who buy more than $400 billion of state and local debt a year that something is being done to stem rising costs.

Benefits paid by the 100 largest public pensions in the five years that ended June 30 grew an average of 8% annually, calculations based on U.S. Census Bureau reports show. In that period, the median annualized investment return was about 3% for public funds with more than $5 billion of assets, said an August report from Wilshire Associates, an investment adviser in Santa Monica, California.

The U.S. recession and stock-market collapse drained about $835 billion of value from the 100 largest public funds, according to the Census Bureau. As a result, benefit payments by those funds amounted to 7.5% of assets in the 12 months ended June 30, 2009, up from about 5% two years earlier, the census figures show.

Unaltered Trend

Even an investment rebound in the year that ended June 30, 2010, when Wilshire reported the median return on public retirement funds was about 13%, did little to alter the trend. Funds in at least eight states that reported investment results for the fiscal year still spent more than 10% of their assets on benefits, Bloomberg data show.

"The fact such a large portion of assets is flowing out each year really challenges the longevity of these funds," said Joshua Rauh, who teaches finance at Northwestern University in Evanston, Illinois. He projected retirement accounts in his and other states would run out of money within a decade. "It will be a crash landing," he said.

The rising share of assets consumed by benefits is "interesting" but misleading, said Keith Brainard, research director of the Baton Rouge, Louisiana-based National Association of State Retirement Administrators. He pointed to the offsetting effect of annual payments into funds made by workers and state governments.

"Employer contributions tend to fluctuate, but employee contributions are remarkably steady," he said.

Unequal Gains

From 1998 to 2008, the most recent full statistics from the Census Bureau, state and local government payments into retirement funds almost doubled to $82 billion. Over the period, worker contributions rose 70% to $37 billion.