Nine Fallacies Used to Defend Public-Sector Pensions
February 14, 2013
Public pensions require fundamental reform, but defenders of the current system have advanced arguments that do not reflect sound economic thinking. These public pension fallacies endure in political debates, even as finance economists have roundly rejected them. Jason Richwine, a senior policy analyst at the Heritage Foundation, addresses nine of the most common fallacies promulgated by defenders of public pensions.
- Fallacy 1: The average pension payment is a good indicator of the generosity of the plan's benefits.
- Fallacy 2: The cost of a public pension plan is equal to whatever the government contributes to the pension fund each year.
- Fallacy 3: Public pension plans can "assume away" risk because governments are long-lived.
- Fallacy 4: Advocates of risk-adjusted discounting are merely a niche group of contrarian economists.
- Fallacy 5: Critics of public pension accounting assumptions are projecting low rates of return.
- Fallacy 6: The investment returns earned by a pension fund pay for most pension benefits, so taxpayers are actually charged very little.
- Fallacy 7: Public pensions are not overly generous because they are simply deferred compensation.
- Fallacy 8: Generous pensions are necessary because some government employees do not participate in Social Security.
- Fallacy 9: Closing a public pension carries major transition costs.
With public pension costs straining the budgets of state and local governments, fundamental reform of the way in which public employees receive retirement benefits is needed. Unfortunately, defenders of the current system have advanced arguments that do not reflect sound economic thinking. These public-pension fallacies are so often repeated that many seem to have become conventional wisdom in some circles, even as finance economists roundly reject them. Correcting these fallacies will improve public discourse on pensions and remove an impediment to reform.
Source: Jason Richwine, "Nine Fallacies Used to Defend Public-Sector Pensions," Heritage Foundation, February 5, 2013.
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