Working In These Times
Irrational Exuberance: The Trouble With Hysteria Over Public Pension Shortfalls
WASHINGTON, D.C.—On Monday, the U.S. House of Representative’s Judiciary Committee held a hearing on public pension funds and states' shortfalls in funding them. Republicans have used the pension problems as an occasion to attack public-sector unions.
The committee hearing was full of bombastic rhetoric that unrealistic obligations to union workers are causing the pension problem. Joshua Rauh, associate professor of finance at Kellogg School of Management at Northwestern University, testified at the hearing that unfunded pension liabilities are "hidden debt" that "will eventually force states and localities to choose among the unpalatable options of cutting services, raising taxes, attempting to reduce benefits owed to public employees, defaulting on other obligations or seeking a federal bailout."
However, economists like Dean Baker disagree with Rauh’s characterization of unfunded pension liabilities. A new report from Baker's Center for Economic and Policy Research (CEPR), “The Origins and Severity of the Public Pension Crisis,” shows that the main reason public pension shortfalls exist at all is the downturn in the stock market following the housing crash in 2007-2009, not inadequate contributions by state governments.
Contrary to what many opponents of unions claim, the new report shows that pension shortfalls are not causing an economic downturn. (It should be noted that the Center for Economic and Policy Research receives no funding from organized labor, so the study has serious weight).
Dean Baker, a co-director of CEPR and author of the report, indisputably shows that the pension obligations that unions negotiated with states would be completely realistic had the economy recovered. It demonstrates that if pension funds had just earned returns equal to the interest rate on 30-year Treasury bonds since 2007, their assets would be more than $850 billion greater than they are today – filing the current funding gap.
“Much of the recent discussion of public pensions is misleading,” Baker says. “The shortfalls represent a small percentage of each state’s economy and, barring another sudden reversal of the stock market, are manageable.”
Anti-union commentators frequently note that pension obligations will bankrupt states. However, Baker’s study points out that the size of the projected state and local government shortfalls measured as a shot of future gross products appear manageable. The study shows that the total shortfall for pension funds is less than 0.2% of projected gross state revenues over the next 30 years.
Keith Brainard, research director of the National Association of State Retirement Administrators (NASRA), who appeared before the Judiciary Committee’s Subcommittee on Courts, Commercial and Administrative Law, debunked several of the arguments put forward by right-wing think tanks.
“One such report compares, for many states, local governments’ unfunded pension liabilities with the tax effort of only the state. However, local governments are also responsible for funding pension liabilities, and excluding local sources of revenue “produces a distorted and misleading measure,” said Brainard. “This is akin to measuring the mortgage capacity of a working couple, yet considering the income of only one of them."
Pension funds hold $2.8 trillion in trust (from which they pay benefits), which is roughly 14 times the amount they distributed in benefits last year, according to Brainard. “Using even conservative estimates, pension funds representing the vast majority of public employees will be able to continue to pay benefits for decades, if not into perpetuity.”
It’s important that union members understand that hysteria over pension funds going bankrupt, or bankrupting states, is just that—hysteria. It's just another avenue for the enemies of unions to demonize organized labor.