Skip to Content

Are state pensions in crisis?

Governor Scott Walker of Wisconsin and other Republicans have said that the cost of pensions to state employees is unaffordable, and a central reason why collective bargaining needs to be virtually eliminated.

However, as I noted in my article on Wisconsin, it is understandable why the pensions appear under-funded today:

This situation is due to the decline in the value of investments following the financial crisis, rising healthcare costs, and wishful thinking on the part of government officials at the time they agreed to these deals.

Now a paper by Dean Baker of the Center for Economic and Policy Research provides further support to this explanation. Baker's research finds that "the main contributor to the current funding problem facing public pension funds was the collapse of the housing bubble and the subsequent downturn in the economy and stock market." The current shortfalls total approximately $1 trillion, but as Baker notes

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 $850 billion greater than they are today. This is by the major cause of the pension funding shortfalls.... Another $80 billion of the shortfall is the results of fact that states have cutback their contributions as a result of the downturn.

In other words, it was not the unions' fault. Public sector pension managers, like economists and analysts generally, did not expect the financial crash.

But irrespective of how it happened, is it the case that pensions are now in crisis? Baker says no:

The size of the projected state and local government shortfalls measured as a share of future gross state products appears manageable. The total shortfall for the pension funds is less than 0.2 percent of projected gross state product over the next 30 years for most states. Even in cases of the states withthe largest shortfalls, the gap is less than 0.5 percent of projected state product. It is also worth noting that some of this shortfall has likely already disappeared as a result of the recent rise in the stock market.... In sum, most states face pension shortfalls that are manageable, especially if the stock market does not face another sudden reversal.

Or, to put it another way, only if the economy does not grow, will these cost of the pensions become a major burden. It is pessimism about future growth that underlies the panic about pension deficits.

No Responses to “Are state pensions in crisis?” Leave a reply ›

Leave a Reply

Archives

CONTACT ME

I'd like to hear from you. Feel free to email me with comments, suggestions, whatever. I can be reached at mail@americansituation.com.