The truth about public sector pensions

Like most people, I had assumed that the shortfall in state public sector pension funds that is causing budget problems was because the states had not made sufficient contributions to the fund to met their promises. Paul Krugman says that he too bought that argument.

But a new study (pdf) by Dean Baker of the Center for Economic and Policy Research shows that the shortfall emerged only in 2007 and is largely due to the financial crisis. As Baker says:

Most of the pension shortfall using the current methodology is attributable to the plunge in the stock market in the years 2007-2009. If pension funds had earned returns just equal to the interest rate on 30-year Treasury bonds in the three years since 2007, their assets would be more than $850 billion greater than they are today. This is by far the major cause of pension funding shortfalls. While there are certainly cases of pensions that had been under-funded even before the market plunge, prior years of under-funding is not the main reason that pensions face difficulties now. Another $80 billion of the shortfall is the result of the fact that states have cutback their contributions as a result of the downturn.

In sum, most states face pension shortfalls that are manageable, especially if the stock market does not face another sudden reversal. The major reason that shortfalls exist at all was the downturn in the stock market following the collapse of the housing bubble, not inadequate contributions to pension funds.

So the idea that the problem is caused by generous retirement giveaways by state governments to greedy unions is simply false. This serves to remind me that I should not trust any conventional wisdom that aligns itself conveniently with oligarchic interests that control the propaganda apparatus but should always ask for the data.

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