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Changing the Message About Public Pensions

March 30, 2012

For the past two years, some in the media have perpetuated the message that public pensions are running out of money – a Bloomberg editorial said so just this week, and countless other media outlets have also repeated this projection. The source of this striking prediction is usually Joshua Rauh, assistant professor of finance at Northwestern University.

He also advocated that failing public pensions could necessitate federal intervention, not once recognizing that states and localities were already in the process of making reforms.

Now it seems that Dr. Rauh is changing his tune. In a recent post, he writes,

Those “adjustments” are costly/painful for someone, which is the point of the exercise. The runout dates are what happens without adjustments that are costly to some party — public employees, beneficiaries, taxpayers, or recipients of public services.

This bears repeating: “the point of the exercise” is not to sound the alarm that public pension fund insolvencies are imminent. Rather, it is that public pension adjustments will be costly and painful. And so it would seem that Dr. Rauh’s main objective was misrepresented and misquoted for two years.

Yet the Rauh paper made no acknowledgment that employee benefits might be diminished or their contributions might increase, which is an important part of the “pain” now said to be the point of the paper. Nor does the paper address what cost or pain employers would incur in order to preserve or restore the sustainability of their plans. It focuses simply on the message that insolvency is imminent for many state plans.

In his February 14, 2011, testimony to a Congressional Subcommittee, Dr. Rauh stated:

Many pension systems are approaching a day of reckoning. Even assuming 8 percent returns, the assets of the systems in seven states and six big cities would be insufficient to pay for today’s already-promised benefits past 2020.

Nothing in this testimony leads the Congress to believe that the purpose for sounding the alarm about an impending “day of reckoning” was merely to inform Congress that “adjustments” would be costly or painful. This prediction of near-term, widespread pension fund insolvencies is straightforward and unmistakable.

Dr. Rauh’s siren added confusion to the  already complicated topic of public pensions, necessitating extensive explanations to lawmakers and the media about how the claims are unsubstantiated and theoretical, by needlessly increasing alarm, and by unfairly decreasing confidence in the condition of public pension plans.

So, after all this time, why the message change?

It may be because 43 states have enacted major changes in state retirement plans to address long-term funding issues thus negating—not that there ever was any—need for federal intervention.

Or it may be that the run-out dates emphasized were debunked in a U.S. Government Accountability Office report. In fact, the GAO report specifically referred to Dr. Rauh’s study, and said:

The projected exhaustion dates are thus not realistic estimates of when the funds might actually run out of money.

The reality is – and this is both historically and for many states by law – that most states pay the cost of benefits approved (normal cost) plus contributions to pay-down liabilities. This is the Annual Required Contribution (ARC). As the GAO found:

In spite of budget pressures through the recession, most plans continued to receive prerecession contribution levels on an actuarial basis from their sponsors, with most plans contributing their full actuarial level.

So let’s be clear: if a government pays the ARC, and if long-term investments deliver as planned, a public pension plan, is not going to run out of money.

In some cases, paying the ARC will be costly or painful. It’s even possible that some pension plans could face insolvency or other dire choices. But the projection of widespread public pension fund insolvencies, sounded first by Joshua Rauh and repeated as fact for the better part of the last two years, was practically implausible from the outset and remains so today.

Read more:

Are State Public Pensions Sustainable?” by Joshua D. Rauh, Kellogg School of Management, Northwestern University, December 31, 2009

Analysis prepared by Paul Zorn and Mita Drazilov of Gabriel, Roeder, Smith & Company; Paul Angelo of The Segal Company, and Keith Brainard of NASRA, June 1, 2010

Addressing Media Misconceptions about Public-Sector Pensions and Bankruptcy,” by Ronald D. Picur and Lance J. Weiss, Government Finance Review, February 2011

Interview with Center for Retirement Research at Boston College regarding its inclusion of “run-out dates” for 126 public pension plans as an appendix in a recent report

From → Sky is Falling

2 Comments
  1. Josh Rauh permalink

    There is no message change. It has always been the case that raising taxes or cutting other spending to pay for pensions could delay runout dates. The runout dates are based on current government policies, i.e. what happens if no measures are taken. And of those 43 changes you’re touting as having fixed the problem, how many of them affect benefit payments during, say, the next 20 years, and how many do so by any substantial margin? As for the GAO footnote, I’m sure you’re aware you have quoted that out of all proportion and if you had actually chosen to link to the top of my post (http://kelloggfinance.wordpress.com/2012/03/13/termination-vs-ongoing-approach-for-pension-solvency-dates/) rather than just the bit you wanted to take out of context your readers could have seen the discussion of that point and the minimal effect that using an Ongoing method to address the GAO concern would have on the conclusions.

    • Ady Dewey permalink

      The point is not that runout dates could be delayed; that much is obvious. The point is that you made the dramatic — unsubstantiated — claim that public pension insolvencies were imminent and widespread.

      And that has had a cost. Countless individuals, such as long-retired public school teachers, have needlessly worried about the security of their retirement benefit. Your claim caused representatives of public retirement systems to spend hours explaining to policymakers, the media, and their own members how and why your projections are unrealistic and unlikely. Other policymakers have used your misleading projections to pursue an ideological agenda against traditional pension plans for employees of state and local government.

      I can only think that if you had made the point you are making now — that making necessary adjustments to pension plan designs would be costly and painful — you could have invaluably contributed to the dialog instead of distracting from it.

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