Way Down In The Hole

Speaking of rain, here’s a coming downpour:  Pensions.  A new report looks at pension underfunding and the three-card-monte that masks some of the problem. Growing attention to this issue.

Chad Aldeman pushes back on the report at Q & E. He makes the important point that states are different from private employers in one very key way:  The can’t go out of business.   This means they can be treated somewhat differently in terms of pensions.  But, the report’s authors make the crucial point that the unique status of states doesn’t lessen the risk associated with some of their pension choices or obviate the importance of realistic forecasting.

Right now public pensions are like the early days of the S & L crisis, only the cognoscenti are paying attention to the problem.  But one day everyone will wake up and say, wow, where the hell did that huge number come from…

8 Replies to “Way Down In The Hole”

  1. Andy,

    Each state has different finances, and I think the analysis here is wrong to lump everything together. Florida’s system is robust (though one senator is using a two-year-old, outdated report to cause some problems), and whatever problems may affect another state is irrelevant to Florida, and vice versa.

  2. Well, here’s another thing for which teachers can “bend over and assume the position.”

  3. Oh, you forgot this recent attempt by the Washington Post to make this issue easier to understand for the proles:
    Md. sacrifices road repair to pay teacher pensions
    Monday, April 12, 2010
    THE NEXT TIME your car jounces into a monster pothole in the Maryland suburbs, thank the union representing public schoolteachers. It’s thanks to the union’s overgrown clout in Annapolis, and to politicians too timid to challenge it in an election year, that some road repairs are unlikely anytime soon.


    Ahh, the witty, but non-Pulitzer, repartee of Jo-Ann Armao erupts, like a boil.

  4. Florida’s overall retirement system is robust only if you use the 8% assumption. If you use a 6% assumption, then it’s nearly $27 billion in the hole.

  5. The Manhattan Institute analysis correctly noted that public pension systems project a higher rate of return on their portfolio than private pension systems. However, the analysis neglected to note that public pension systems are more conservative in estimating wage growth than private systems. Some pension experts believe that the more conservative approach to projecting wage growth offsets the less conservative approach to projecting rate of return.

    By adjusting one set of assumptions, but not the other, it’s not surprising that the analysis produced some eye-popping numbers across the board.

    No doubt, however, that there are some systems that are in crisis.

  6. Where are you getting that information, Stiles? Most private plans are defined contribution, as to which no assumption of wage growth is even relevant.

    When I do a quick check to compare CalSTRS to IBM’s defined benefit plan, the latter assumes 4% wage growth, while CalSTRS assumes for a 20-year-old entrant 11.05% growth for the first three years of employment, 7.75% for years 4 and 5, and so on, on a declining scale. It dips below 4% only after year 20.

  7. Stuart, thank you for responding. I should have been more clear that I was referring to private defined benefit plans, which are increasingly uncommon.

    The information was the quote in the linked article by JP Aubry of Boston College’s Center for Retirement Research. I think they are viewed as a reputable center on these issues.


    The most recent report from CRR is at http://crr.bc.edu/images/stories/Briefs/slp_10.pdf.

    While I think the situation is modestly more favorable than your analysis, it’s a matter of degree. This is a serious problem in the aggregate and absolutely dire in some states that have not managed their public pension plans well. I think there are states, however, that are in solid shape and I didn’t really see that in the paper this week.

  8. Thanks. But now I wonder what Aubry’s support was for his statement about wage assumptions . . . .

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