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Home Publications Blogs Beat the Press Washington Post Whacks Readers Over the Head With REALLY BIG NUMBER to Advance Agenda on Cutting Pension Benefits

Washington Post Whacks Readers Over the Head With REALLY BIG NUMBER to Advance Agenda on Cutting Pension Benefits

Saturday, 20 July 2013 07:50

The Post's lead editorial on Detroit's bankruptcy highlighted the role of pensions in the city's finances. It warned readers that the problem of large unfunded pensions is common, telling 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."

Got that? $3.8 TRILLION in unfunded liabilities! Let's see, I've $26.43 in my pockets, how does that compare? [See correction note -- I was far too kind to the Post here.]

Okay, this is exactly the sort of irresponsible budget reporting that I wrote about yesterday. How many Post readers have any basis for assessing this $3.8 trillion unfunded liability figure?

It's not hard to put this number in a context that would make it meaningful to readers. First, it is important to note that this estimate is over a 30-year period, the normal planning period for public pensions. It is also worth noting that the estimate is not based on an assumption of "strong rates of return." Rather, the estimate assumes rates of return that are consistent with growth projections from the Congressional Budget Office and other forecasters.

If the Post wanted to make this number meaningful, the obvious point of reference would be projected GDP over this 30-year period. The discounted value of GDP over the next 30 years is roughly $447 trillion, which means that the estimated shortfall is a bit less than 0.9 percent of GDP. That's hardly trivial, but not obviously a crushing burden either. Furthermore, many state and local governments are already contributing at rates that are consistent with filling this gap, meaning that no additional commitment of public funds will be needed to fill the shortfall, current levels of taxation are adequate.

The Post would have provided this information if the point was to inform readers. But that obviously was not the paper's point. The Post's point in this editorial was to scare readers to advance its agenda for cutting public pensions.

Comments (4)Add Comment
written by Jennifer, July 20, 2013 8:56
That editorial is pretty awful. There is no question that Detroit has a lot of problems, but plenty of relatively neutral parties, such as Cate Long at Reuters, do not claim pensions as being a particular problem. She estimates the pension debt at about 1/3 of the overall debt. She has been highly critical of how the Orr, the EM of Detroit, has made pensions more of an issue than they should be.
It also mentions that Chicago just got marked down by Moody's. It does not mention that Moody's just came up with a whole new evaluation system, which many consider unnecessarily harsh, as being the primary reason for the downgrade.
My favorite part though is this:
"Unions, meanwhile, while wave the Michigan constitution, which, like others around the nation, purports to make their pensions inviolable contract."
Well, yes, last time I checked the constitution, state or federal, is considered the highest law, at least as important as any bond contract. I am guessing the people who wrote this editorial would also be the same people who would tell a distressed home owner that they signed a contract, and that contract needs to be honored no matter what.
The other thing people seem to not recognize is where to people think that money from pensions is ultimately going to go? Why into consumption, into the local economy which will ultimately help any city or state.
socially, pensions are transfers, hence costless to the economy as a whole
written by pete, July 20, 2013 9:34
This is the goofy thing missing from social security and pension discussions. As transfers, these have no effect on output other than small distributional issues. Same as unemployment, food stamps, and so forth. Simply taking from Pete and giving to Paul. So pensions should not be worrisome as a whole. If Detroit were to tax folks more and then give them the money back in pensions, would anyone notice. Well those being taxed would, for sure. Cities with positive value of property should not declare bankruptcy. City's own property, essentially. I pay about 10K a year in taxes, that is essentially rent to the city. My house has a positive value. If they double my taxes my house will fall in value. But no need to default! This was especially true with Orange county when that nut case lost a ton leveraging interest rate products. With Detroi, they were probably listening to somebody like Phil Angelides who upped CA pensions during the dot com bubble.
Drunk Austerians Looking for Car Keys and Unfunded Liabilities Under the Street Light
written by Last Mover, July 20, 2013 9:47

Unfunded liability? What's that supposed to mean? Compared to all those funded liabilities?

So liabilities like climate change are "funded" because it doesn't exist, right? And liabilities of obscenely expensive, unnecessary, broken weapon systems by the Pentagon that are funded are not a liability, right?

And liabilities for a comletely broken health care system that cost twice as much as other countries are not liabilities because it's funded, right? And liabilities for a trillion dollar output gap are unfunded because it's not a fundable liability, right? And trillion dollar liabilities for two failed wars were not really liabilities because opportunity cost doesn't count as a liability, right?

As usual the drunk zero-sum austerians wandering around under the streetlight have stumbled across yet more evidence subject to measurement so precise it's exactly wrong at the cost of being approximately right.

The unfunded liability. It's an economic disaster either way - funded or not funded.
Funded vs Unfunded
written by ZachPruckowski, July 22, 2013 10:04
LM - a liability is funded or unfunded depending on whether you have the money set aside to pay it. Pensions are generally paid into a fund by the employee and the employer, then that fund is invested and the proceeds of the fund are used to pay out the pension's disbursements.

If the fund will continue to have money to make all the disbursements over X years, the pension is funded. If the fund doesn't have any money, the pension is unfunded. If it has some money but not enough, the pension is underfunded, or partially unfunded.

To calculate this, studies look at the estimated future contributions, future payouts (based on number of eligible employees and actuarial calculations), and projected investment income (a factor of long-term return rate and how much money is in the fund).

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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.