Economists: The Missing Heroes of the State and Local Government Pension Crisis Print
Dean Baker
TPMCafé, August 10, 2010

See article on original website

The latest cool thing for the Washington elite is to beat up on school teachers and firefighters for their overly generous pensions. It turns out that some of these public sector employees get enough money in their pensions that they can actually enjoy a decent retirement.

This is an outrage in modern America. After all, the Wall Street boys have made it so the vast majority of private sector workers can't get by in their old age, and they plan to cut Social Security and Medicare to make it even harder. So given that factory workers and retail clerks can't count on a decent standard of living in retirement, where does a school teacher get off earning a pension of $3,000 a month? The media want the public to be outraged over this incredible injustice. Of course, the men and women behind the curtain are saying: "Pay no attention to the Wall Street people earning millions of dollars a year."

The attempt to provoke anger has momentum because most state and local pension funds are hugely underfunded. This is blamed on corrupt politicians who concealed pension fund expenses and used dubious accounting.

While this may be true in some cases, the real culprits of the underfunded pension funds are the country's leading economists. Economists from across the political spectrum told the country that we could assume that stocks would provide an average return of 10 percent a year even when the stock bubble was at its peak in 2000. This consensus included the center-left economists in the Clinton Administration as well conservative economists. It was treated as absolute gospel in all the plans to privatize Social Security. Both the Congressional Budget Office and the Social Security Administration assumed that the market would give an average of 10 percent nominal returns in their analysis of Social Security privatization proposals.

Given the consensus within the economics profession, who could blame the managers of state and local pension funds for using the same assumption? After all, were they supposed to question the assessments of economists teaching at Harvard and M.I.T.?

And, it does make a difference. If the economists' projections had been right, $1 billion held in the stock market in 2000 would be worth about $2.5 billion today. Instead, it is worth about $1 billion. In short, if the economists had been right, most of the troubled pension funds would be just fine today.

So let's give credit where credit is due. The media want us to beat up school teachers and firefighters, but the real reason that more tax dollars might be needed to meet pension commitments is that the economists were clueless.