In a matter of weeks, the covid-19 pandemic has upended the global economy.

This meltdown has exposed the fragility of public pension systems in the United States. Sudden job losses, shuttered commerce and the stock market collapse have exacerbated the solvency crisis of many pension systems. Moody’s Investors Service estimates that the stock market sell-off vaporized $1 trillion of value from public pension portfolios, or about 21 percent of the assets that pay for the retirement plans of state and local employees.

Long before the pandemic, pension managers had invested in risky assets to overcome chronic underfunding with outsized returns in the stock market. Now those returns have evaporated. “It’s like a rubber band that’s been stretched too thin,” remarks Maria Pappas, the treasurer for Cook County, Ill. “What I’m telling you is, the rubber band is about to break.”

Public pensions did not always invest so heavily in the stock market. In 1942, state pensions fully invested 90 percent of their money in the public bonds of federal, state and local governments, and just 10 percent in stocks, corporate bonds, mortgages and other private assets. But within 30 years, the ratio had flipped: By 1972, state pensions invested 96 percent of their funds in private securities, and just 4 percent in public bonds.

Over the past 60 years, these investments have become even riskier in an effort to maintain benefit levels while reducing taxes. As of 2018, according to the New York Times, state pension funds invested 74 percent of their money in risky assets like stocks, private equity and hedge funds — up from 69 percent in 2010, and 61 percent in 2001. Now the retirement benefits of millions of public workers are jeopardized, leaving two options: Governments must increase taxes or reduce retiree benefits. Either choice will be disastrous in this economic climate. While the covid-19 crash did not create the reliance on the stock market, it has revealed the consequences of these risky gambles.

The risky investments would have surprised the architects of public pension systems. When New York lawmakers created the New York State Employee Retirement System (NYSERS) in 1920, for example, the fund was only allowed to invest in U.S. Treasury bonds and the municipal bonds of state and local governments. These bonds provided steady investment yields while channeling pension funds into civic infrastructure like roads, sewers, parks and schools. As New York Comptroller Morris Tremaine, who managed the NYSERS portfolio, described the strategy in 1929, “I have continued investing largely in the bonds of the municipalities of New York State … assisting them in procuring funds for needed improvements at a fair rate of interest.”

These public investments, however, contained a structural vulnerability. Municipal bonds are exempt from state and federal income taxes; as a result, they offer lower yields than similarly risky — and taxable — corporate bonds. Even so, the difference between the yields of public and private investments remained marginal until World War II, when income tax rates shot up to unprecedented levels. With the marginal income tax rates upward of 90 percent, high-income investors fled into municipal bonds as tax havens. The surge in demand drove down yields even more. By 1945, tax-exempt municipal bonds yielded less than half of taxable corporate bonds.

Public pension managers faced a dilemma: Should they continue investing in municipal bonds, despite their lower returns? Or should they shift into higher-yielding private securities? What was more important: long-term stability or higher returns?

Public officials resolved this dilemma through the ideology of “fiduciary duty.” It was the obligation of a pension manager, they argued, to pursue maximum returns. Anything less would shortchange retirees.

Swayed by these arguments, state legislatures gradually deregulated the investment powers of public pensions. In 1952, New Jersey authorized corporate bond purchases “to obtain investments with a higher rate of return.” The next year, Pennsylvania did so “to meet the state’s guarantee of 4 percent interest on pension funds.” New York City followed the same path, in 1953 authorizing the city comptroller to invest in corporate bonds.

Speaking to the Municipal Finance Association of America in 1958, New York State Comptroller Arthur Levitt Sr. declared: “As trustee of the Retirement System I am duty bound to seek the highest return the market affords.” Unlike Tremaine in 1929, who prioritized public investments at “a fair rate of interest,” Levitt pursued, as he told another group, “the highest rates afforded by the market.” Following this logic, public pensions nationwide shifted their assets into private investments.

For most states, the transition from municipal to corporate bonds was the first deregulatory step down a path toward corporate stocks, mortgages and other risky investments. During the 1950s, pension managers dumped municipal bonds and plowed funds into a variety of corporate securities, eventually dedicating most of their portfolios to these investments. To be sure, this shift from public to private assets generated higher returns, allowing governments to expand benefits at minimal public cost.

It also, however, hitched the security of public workers to the stock market. Financial shocks now jeopardize the retirement plans of teachers, nurses, bus drivers and garbage collectors — the essential workers that are keeping society functioning today. Like the last crash in 2008, many pensions will feel pressure to double down on risky investments when the worst of the crisis is past.

This investment strategy has also undercut the stability of state and local governments. Over the past decade, a handful of financial behemoths have gobbled up a large share of the municipal bond market. This has allowed investors to easily buy and sell government debt, but it has also made municipal bonds, like public pensions, vulnerable to shocks. Back in July 2019, one investment banker worried what would happen to municipal bonds “when everyone runs for the exit at the same time.” This is precisely what has happened amid the global pandemic.

The long history of public pensions suggests other options. Reinvesting public funds in public investments could address several crises at once. Local governments are desperate for financing at fair rates of interest, while roads, schools and other infrastructures continue to crumble. A reconstitution of the early 20th-century arrangement, when pensions prioritized public investment over maximum returns, would require policymakers to reckon with the costs of retirement benefits in the present, rather than pushing them off into an uncertain future.