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Home Publications Blogs Beat the Press The Origins of "Unsustainable" Public Pension Obligations

The Origins of "Unsustainable" Public Pension Obligations

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Saturday, 13 November 2010 08:51

The NYT and other major media outlets have continually referred to public pensions as being "unsustainable" or out of control. The implication is that public sector workers get exorbitant pensions.

In fact the main reason that the public pensions are underfunded at present is not the generosity of the benefits, but rather the plunge in financial markets that followed the collapse of the housing bubble. If public pensions had earned just a modest 5.0 nominal annual rate of return since 2007 their assets would stand at $3.6 trillion today, 41.3 percent above current levels. This would eliminate most, if not all, of the their reported shortfall.

 

Comments (9)Add Comment
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written by izzatzo, November 13, 2010 9:44
It's called RISK Mr Baker Faker, and it's ex ante for real capitalists, not ex post for socialists like you who second guess on Monday the prior Saturday football game.

If every one who ever invested got what they expected there wouldn't be any risk would there, and we know what that means don't we - SOCIALISM. Never mind the football game. We already know what the score is.
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written by warpal, November 13, 2010 10:02
izatso, do you post comments anywhere else? I would like to read more of your material.
Speaking of unsustainable...
written by ninetyeightpercenter, November 13, 2010 10:20
How sustainable does the media find the accretion of the world's wealth by the economic elite?
And if housing had kept rising at 10% per year.....
written by pete, November 13, 2010 12:02
Really kind of miss the whole argument here, Dean. Ex post analysis doesn't get us very far but if you want to go down that road...Investment advisors have long promised too high a return....so if we now go ex post, I suppose you are implicitly arguing, there should have been more stocked away. This would have meant lower net pay for workers in exchange for these pensions....its all gotta add up. We did not ask our public workers to "save" enough, so, ex post, based on that under saving, the extant promised pensions are too high.
Not just bad markets, bad politicians
written by JBG, November 13, 2010 12:27
Anyway, Dean's basic premise is at most part of the story, at least in Illinois, where the State has failed for decades to make its share of payments into the pension funds. Even if markets had fully done what they're spozed to do, Illinois' public pension funds would be in serious trouble. As it is, they are in SERIOUS trouble.
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written by gluggau, November 13, 2010 9:03
Dean it is the UNIONS the UNIONS are the problem THE UNIONS and high taxes the spending and the high taxes Dean the public employees MAKE TOO MUCH money they make more than the producers and they don't do anything except twiddle their thumbs and eat up our taxes like chocolate bars Dean the UNIONS Dean if only we didn't have UNIONS everything would be great oh and maybe if we didn't have any poor people any immigrants except when we need them to do cheap labor no taxes no regulations no taxes no UNIONS no entitlements no UNIONS no regulations on business no government to speak of except something that will funnel money to our Middle East allies and declare more wars but no UNIONS Dean because they're the problem with the pensions and everything else if only we would just let Wall Street do its business Dean just no regulations no regulations no regulations and no UNIONS Dean then even the unicorns would be able to retire at 45 and Baby Jesus would be very happy.
I agree w Pete here Dean, you destroyed your own argument there....
written by The Professor, November 14, 2010 10:41
I expect more from you Dean, you sound reasonable and balanced, but your analysis is fatally flawed there, just read what you just wrote - "...the collapse of the housing bubble..." so question Dean: if those investments were NEVER valuable anyway, wasn't the pension asset valuation unsustainable anyway from inception? and I've done some research focused on the public transit systems, all unionized, and found that in most if not all cases, defined benefits were upped significantly, vesting periods reduced, and average years of earnings lowered during all the decade of the 2000's, in some extreme cases even RIGHT WHEN THE MARKETS WERE ALREADY COLLAPSING!!!! what, as you say, the collapse uncovered was HOW unsustainable those defined benefits in the aggregate already were, not IF they were on the aggregate unsustainable (and I concur that it is not necessarily an issue of extremely high per pensioner benefits, which in quite some cases though seems true). And Dean, my definition of unsustainable is when public services for the community and voters who in many cases created those taxpayer funded public agencies get reduced or cut in order to continue paying WITH NO CHANGE those same pensions contributions. It is a total travesty of social justice - I'm sure you would agree that is not even close to the concept of fairness and justice that Rawls proclaimed. And that is not how restore justice - if the elite 1% ammased illicit, improper wealth by financializing the entire economy, how this yet another form of unjustice restores fairness and equality? two wrongs do not make one good.
housing bubble and wealth
written by pete, November 15, 2010 11:01
Well this is Dean's big unending paradox....$8T in wealth lost? But is was a bubble? Choose one, can't have both. Bubbles do not represent wealth.
Role of Trust
written by Jeff Zink, November 16, 2010 1:21
The Professor writes "I've done some research focused on the public transit systems, all unionized, and found that in most if not all cases, defined benefits were upped significantly, vesting periods reduced, and average years of earnings lowered during all the decade of the 2000's, in some extreme cases even RIGHT WHEN THE MARKETS WERE ALREADY COLLAPSING!!!!" True, but most people who receive pensions do not make the rules under which pensions (and defined contribution plans) operate. The people who do make those rules are expected to know better. They did not, assuming what you say is true, and now you blame the people who did not make the decisions. Principal-Agent problem combined with poor information.

Pete,
People will treat bubbles as wealth, and when they collapse, they will treat that as lost wealth. They will then cut back on consumption, etc, which will feed throughout the economy. So no, it's not "real" wealth, but people perceive it as "real" wealth. Nobody listed to anyone like Dean that said "Um, people, this is an asset bubble and should not be treated like real, permanent gains."

Elsewhere, Dean has pointed out the implications of assuming returns would be too high. The "No Economist left behind test" is one such example. Underfunded pensions is another example, since with a higher return, people do not need to put as much money in at the start to have the same ending amount needed to cover promised benefits. Again, plan administrators should have known better. Most economists should have known too. But they didn't, so here we are.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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