Morning Edition had a segment on a change in public pension fund accounting that will show many funds have a much larger shortfall. The piece included comments from a Stanford business school professor, Joshua Rauh, that complained that the discount rate assumed by pension funds assumed that future pension fund returns will be like past returns.

Rauh's statement to this effect is inaccurate, or at least incomplete. The main question mark in pension fund returns is the return on stock, which typically accounts for 60-70 percent of pension fund assets. While stock returns can fluctuate hugely year to year, over the long-term (like the 30-year time horizon of most pension funds) they are a relatively predictable function of current price to earnings ratios and the rate of growth of the economy.

Given current price to earnings ratios in the market, it would require an unprecedented economic collapse for the market to yield substantially lower returns than what pension funds are now assuming. Ruling out a complete economic collapse might be assuming that the future will be like the past, but this sort of extrapolation is pretty much impossible to avoid.

The piece also wrongly implied that the Governmental Accounting Standards Board (GASB) agreed with Rauh's assessment in its proposed changes to accounting standards. This is not true. A pension fund that is fully funded using the 8.0 percent discount rate that Rauh criticized would not see any change in its funding status under the new GASB rules. Only pensions that are underfunded by the old accounting standard that would see a change in their calculated level of funding. 

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