November 2015, Dean Baker and Nick Buffie
There is an ongoing debate in policy circles about the appropriate accounting standards for public sector pension funds. There are major differences between the standard practice of most pension funds and the policies that are advocated by many academic economists, most notably Robert Novy-Marx and Joshua Rauh (NM&R). In several papers they argue that most public sector pension funds are severely underfunded. In recent years, most public sector pensions have been less than fully funded even using standard pension fund accounting. However, according to NM&R, the shortfalls are two to four times as large as indicated by standard pension accounting.
This paper calculates the impact on the economy of adopting NM&R funding rules during the last recession. Specifically, it calculates the impact on GDP and employment if state governments had decided to fill the funding gap calculated by NM&R over a 15-year time horizon, as they advocate.