Irrational Exuberance: The Trouble With Hysteria Over Public Pension Shortfalls

[Omaha Steve]

http://www.inthesetimes.com/working/entry/6964/debunking_the_hysteria_about_public_employee_pension_shortfalls/

Wednesday Feb 16, 2011 2:59 pm

By Mike Elk

WASHINGTON, D.C.—On Monday, the U.S. House of Representative’s Judiciary Committee held a hearing on public pension funds and states' shortfalls in funding them. Republicans have used the pension problems as an occasion to attack public-sector unions.

The committee hearing was full of bombastic rhetoric that unrealistic obligations to union workers are causing the pension problem. Joshua Rauh, associate professor of finance at Kellogg School of Management at Northwestern University, testified at the hearing that unfunded pension liabilities are "hidden debt" that "will eventually force states and localities to choose among the unpalatable options of cutting services, raising taxes, attempting to reduce benefits owed to public employees, defaulting on other obligations or seeking a federal bailout."

However, economists like Dean Baker disagree with Rauh’s characterization of unfunded pension liabilities. A new report from Baker's Center for Economic and Policy Research (CEPR), “The Origins and Severity of the Public Pension Crisis,” shows that the main reason public pension shortfalls exist at all is the downturn in the stock market following the housing crash in 2007-2009, not inadequate contributions by state governments.

Contrary to what many opponents of unions claim, the new report shows that pension shortfalls are not causing an economic downturn. (It should be noted that the Center for Economic and Policy Research receives no funding from organized labor, so the study has serious weight).

FULL story at link.

[customerserviceguy]

1. Agreed, the recent stock market crash has hurt pension funds

as well as the historically low rates of interest that we've seen for the past decade or so. Pension fund planning assumes a rate of return that is slightly above what people used to get from savings accounts decades ago, and what looked fairly meager in the 1960's looks like a pretty nice return these days.

I used to be a tax accountant, enrolled to practice before the IRS, and pension tax law was the only thing that truly made my eyes glaze over. Pension accounting is indeed one of the darker sciences, and it's all been exposed to be smoke and mirrors, that really depended on a rising tide of workers following the ones who retired from the postwar era on. Today, we don't have that next tier of people paying in. The leading edge of the baby boomers turns 65 this year, and there are a couple of decades of retiring waves after them.

The system always depended on growth, if a company has 100 workers today that grow to 1,000 workers in thirty years, then there's enough money coming in to pay the retirements of the first hundred. If the company employs a million workers thirty years after that, there's enough for the thousand, and so on. I'll admit, I've over-simplified the numbers, but you get the general principle.

As we know, there are limits to growth. They're hitting the pension systems at the very same time that outlays are projected to increase. This is crunch time, when push is indeed coming to shove.

[Maine_Nurse]

2. Except in some states, a lot of it is true.

Our state repeatedly "borrowed" from our pension fund, then kept it in an unfunded state. That has left it in a deep hole. By law, it must be brought up to par by 2025 (IIRC). It has caused significant budgetary issues. Our problem had very little to do with the stock market issues as we were deeply in the hole long, long before then.