Robert Novy-Marx and Joshua D. Rauh write,
The true extent of public pension underfunding has been obscured by governmental accounting rules, which allow pension liabilities to be discounted at expected rates of return on pension assets. This paper takes stock of the distribution and magnitude of prospective underfunding in state pension plans given current state pension funding, asset allocation and liability estimates. This analysis demonstrates the large burden that current public pension policy places on future generations. In particular, we show that while the plans appear almost fully funded under government-chosen discount rates, there is a large probability of significant shortfalls in the future. The shortfalls are likely to occur if the economy performs poorly, and so are particularly costly to future generations. The cost of fully insuring future taxpayers and plan participants against these potential shortfalls would approach $2 trillion.
The paper is dated September, and since then I’ll guess that a lot of the pension funds have lost 25 percent or more of their value.
They point out that the degree of underfunding in state pensions far exceeds that of corporate pension plans–not that the latter should be of no concern.
If you are an opponent of markets and a fan of government, then please explain why you are not frightened by the power of government to create enormous unfunded liabilities.
READER COMMENTS
Luke G.
Dec 2 2008 at 9:22am
Oh man, we’re experiencing this same thing locally.
I live in Springfield, MO, where the city fathers have recently announced that there is a huge, $194 million hole in the firefighter/police pension plans.
Why is there a hole? Well, there just is. They’re kinda cagey on how the hole got there…apparently it was never really fully funded to begin with.
So, naturally, the city fathers want to raise the sales tax by 1 cent to meet the shortfall. (Hey, half of it will be paid by tourists, they tell us, so it won’t hurt locals that bad, right?) It goes on ballot this February, and if it is voted down, they threaten to put the proposal back on every local election ballot thereafter till it passes.
http://www.news-leader.com/apps/pbcs.dll/article?AID=2008812030325
http://www.news-leader.com/article/20081123/OPINIONS02/811230313
SteveM
Dec 2 2008 at 2:30pm
Public sector union bosses tell us that they are not the problem, as in this Huffington post…
http://www.huffingtonpost.com/gerald-mcentee/public-employee-pensions_b_145172.html
Dan Weber
Dec 2 2008 at 2:32pm
Because then the faction of which I am a fan can seize more power. Duh!!!11
Lord
Dec 2 2008 at 5:31pm
Ooooh, big scary unfunded liabilities. Because there is such a thing as bankruptcy?
Jonathan
Dec 2 2008 at 9:47pm
Arnold,
Does one have to be an opponent of markets to be a fan of government?
What the hell?
Comments are closed.