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Home Publications Blogs Beat the Press Unfunded Pension Liabilities Are $1 Trillion, Not $3.8 Trillion: Never Take Anything In a Washington Post Editorial At Face Value

Unfunded Pension Liabilities Are $1 Trillion, Not $3.8 Trillion: Never Take Anything In a Washington Post Editorial At Face Value

Saturday, 20 July 2013 13:16

Sorry folks, I committed the cardinal sin of accepting an assertion from a Washington Post editorial without carefully checking it myself. This morning the Post's lead editorial used the occasion of Detroit's bankruptcy to beat up on public sector pensions. The Post told readers:

"A new survey by scholars at Boston College finds that state and local pension plans have $3.8 trillion in unfunded liabilities, even assuming strong rates of return."

I did actually check the study and saw the chart showing $3.8 trillion in liabilities. I then wrote up my blog post accordingly, pointing out how large $3.8 trillion was in the context of the next 30 years' GDP, the planning horizon for pensions. 

But I apparently forgot to think about this number for the necessary 10 seconds before writing. The $3.8 trillion figure should have struck me as way too large for an estimate for unfunded liabilities, and in fact it is. Here's what the Boston College study said (page 2):

"In the aggregate, the actuarial value of assets amounted to $2.8 trillion and liabilities amounted to $3.8 trillion, producing a funded ratio of 73 percent."

You see, the $3.8 trillion figure was an estimate of total liabilities, not unfunded liabilities. Since the pensions have $2.8 trillion in assets, their unfunded liabilities are just $1 trillion. Or, to put this in terms that may be understandable to Post readers, the unfunded liabilities are 0.22 percent of projected GDP over the next 30 years. And, as I noted in my earlier post, most state and local governments are already funding at levels that are consistent with making up this shortfall so there will no required tax increases or spending cuts to meet these future obligations.

So I apologize for accepting the Post's $3.8 trillion figure for unfunded liabilities without looking more closely. Clearly the Post has an agenda to weaken or end public sector pensions and is perfectly happy to use bad numbers to accomplish this goal.


Addendum: The Post added a correction some time on Monday.

Comments (12)Add Comment
written by zoidberg, July 20, 2013 5:10
Is there any reason the federal government can't move all those pensions to their balance sheet and then just print money to pay it off?

Seems to me like that would solve a lot of problems, in fact, almost all of them.
Post Error
written by dweb, July 20, 2013 5:12
No problem. The Post will just repeat the figure, or better yet, everybody from Rush Limbaugh to Pete Peterson to Erskine Bowles and Paul Ryan will repeat it.

And before you know it, it will be reality.
mr., Low-rated comment [Show]
written by John Q, July 20, 2013 6:37
As Brad DeLong is so often moved to remind us:


"Never Take Anything In a Washington Post Editorial At Face Value"
written by Ed R., July 20, 2013 8:13
What so you mean, "in an editorial"? You can't take anything in their news stories at ace value, either. In the last decade or so, they've gone from being a reliable news source where you could normally believe that what they printed was true, to being an unreliable source where you needed a reliable source to vouch for what they printed, to being an anti-reliable source where you need two or three reliable sources to make up for the Post claiming something was true.
written by Mark Jamison, July 21, 2013 7:26
And this morning PK has a Blog post showing another way to put this in perspective. The annual underfunding amounts to about 25 billion per year across all entities. I'll let Dr. Baker reduce that to percentages but it's clearly time to put away the scary voice and see this for what it is; an attack on public pensions based on ideology.
anotther way to say it
written by ezra abrams, July 21, 2013 8:11
We need to increase payments , in the entire US, by about 25 billion a year (krugtron blog today)

What does 25 billion a year mean in the United States of America ?

If the USA was a family earning 40,000 dollars a year, it would need to make an extra payment to it's pension of ...60 dollars a year
HOwever, the issue is how is the 25 billion concentrated; do Illinois and New Jersey face much larger proportionate burdens ??
Other things to remember
written by Jennifer, July 21, 2013 1:15
There is no question IL is in a hole, but it is important remember that cities/states have hardly ever defaulted. There is also this:

"Illinois' state debt is only 6 percent of economic output; the analogous ratio for the federal government is 74 percent. Pension underfunding is a serious issue, but because state workers and teachers only account for about 2 percent of the Illinois' population, it is a much more limited problem than the underfunding of social security and Medicare at the federal level. Finally, unlike depressed cities such as Detroit, a large state such as Illinois has a very diverse and growing revenue base."
From http://www.realclearmarkets.co...00427.html
Note the author of this piece is from the Mercatus Center, a right-wing think tank.
Point of accuracy
written by Thos, July 21, 2013 7:52
My read of the study says that the dollar figures quoted apply only to the sample of pension funds analyzed--90% of state funds but only 30% of local funds, according to endnote 1. Total liabilities and assets over all state and local funds would be higher, but my guess is that Dean Baker's major conclusion--that the unfunded liability is fundable--would not change.
The rule unfunded liability is closer to $5.5 Trillion
written by Clif Purkiser, July 22, 2013 6:15
Well it seems the both you and Mr. Krugman. Didn't really bother to read the Boston College report. The bulk of paper discussed the financial folly of using risky assets (i.e. stocks, hedge funds, commodities and alternative investment) to fund, virtually risk free liability, state constitutionally protected pension payments.

The paper suggest that if instead of using an 8% return rate like many pension plans are assume, and use a more appropriate risk free return of 5%. The total state liabilities balloon from 3.8 trillion to 5.5 trillion. We add to that the more than trillions worth of unfunded health care for early retired state workers and you come up with a 3.7 trillion dollar deficit, or about $12,000 per capita.
A new rule of thumb
written by Ryan, July 22, 2013 2:26
I am rather surprised, because it seems to me that if you are thrown a number with zero context, that ought to raise all sorts of alarm bells. Oh, and amen to Ed R.; WaPo is long down the path of conflating opinion and news.
Clif Purkiser
written by Al, July 25, 2013 4:33
I think that the researchers erred in adjusting the liabilities discount rate to projected risk-free rates, while holding the assets discount rate at 8%. Their reasoning held that liabilities are backed by the government, and are therefore "risk-free". But that same logic means that the assets are backed by the government, at least to the sum of the discounted liabilities. An assumption of risk free debts is another way of assuming that your assets required to cover those debts are also risk free.

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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.