NCPA - National Center for Policy Analysis


July 7, 2009

Public employee pension plans are plagued by overgenerous benefits, chronic underfunding, and now trillion dollar stock-market losses.  Based on their preferred accounting methods -- which discount future liabilities based on high but uncertain returns projected for investments -- these plans are underfunded nationally by around $310 billion, says Andrew Biggs, a resident scholar with the American Enterprise Institute.

The numbers are worse using market valuation methods (the methods private-sector plans must use), which discount benefit liabilities at lower interest rates to reflect the chance that the expected returns won't be realized.  Using that method, University of Chicago economists Robert Novy-Marx and Joshua Rauh calculate that:

  • Even prior to the market collapse, public pensions were actually short by nearly $2 trillion; that's nearly $87,000 per plan participant.
  • With employee benefits guaranteed by law and sometimes even by state constitutions, it's likely these gargantuan shortfalls will have to be borne by unsuspecting taxpayers.

Public pension administrators argue that government plans fundamentally differ from private sector pensions, since the government cannot go out of business.  Even so, the only true advantage public pensions have over private plans is the ability to raise taxes.  But as the Congressional Budget Office has pointed out in 2004, "The government does not have a capacity to bear risk on its own" -- rather, government merely redistributes risk between taxpayers and beneficiaries, present and future.

Market valuation makes the costs of these potential tax increases explicit, while the public pension administrators' approach, which obscures the possibility that the investment returns won't achieve their goals, leaves taxpayers in the dark.

For these reasons, the Public Interest Committee of the American Academy of Actuaries recently stated, "it is in the public interest for retirement plans to disclose consistent measures of the economic value of plan assets and liabilities in order to provide the benefits promised by plan sponsors."

Source: Andrew Biggs, "Public Pensions Cook the Books," Wall Street Journal, July 6, 2009.

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