A Washington Post article reporting on Neil Wolin’s departure from a top Treasury Department job discussed his work on the Dodd-Frank, then noted the controversy around the bill:
“with conservatives saying it is holding back economic growth and liberals complaining it falls short of what’s needed to rein in Wall Street.”
Actually, the liberal position would also be that the bill would slow growth. By allowing Wall Street to continue in its current practices, the government is effectively subsidizing too big to fail banks by tens of billions of dollars a year.
This is money that is effectively being diverted from the productive economy into the hands of the large Wall Street banks. It has the same effect on growth as if the government taxed people this amount to send large checks to the big banks. The fact that the government also did nothing to restrain the speculative practices of large banks, such as Goldman Sachs foray into the aluminum market, also will impede growth by leading to higher prices for consumers and less money for producers.
A Washington Post article reporting on Neil Wolin’s departure from a top Treasury Department job discussed his work on the Dodd-Frank, then noted the controversy around the bill:
“with conservatives saying it is holding back economic growth and liberals complaining it falls short of what’s needed to rein in Wall Street.”
Actually, the liberal position would also be that the bill would slow growth. By allowing Wall Street to continue in its current practices, the government is effectively subsidizing too big to fail banks by tens of billions of dollars a year.
This is money that is effectively being diverted from the productive economy into the hands of the large Wall Street banks. It has the same effect on growth as if the government taxed people this amount to send large checks to the big banks. The fact that the government also did nothing to restrain the speculative practices of large banks, such as Goldman Sachs foray into the aluminum market, also will impede growth by leading to higher prices for consumers and less money for producers.
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Imagine that, interference in the market that raises prices to hundreds or thousands of times the free market price leads to corruption in the research process in China. Interesting piece in NYT.
Imagine that, interference in the market that raises prices to hundreds or thousands of times the free market price leads to corruption in the research process in China. Interesting piece in NYT.
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A NYT article on the fate of Detroit’s retired workers following its bankruptcy made reference to the pension funds’ assumption of an 8 percent return following its bankruptcy. There are two points worth making on this issue. First, it was an error to assume an 8 percent return in 2007 given the ratio of stock prices to trend earnings. At the time, that was over 20, which meant that stock could be expected to provide a real return of less than 5 percent going forward. Adding in an inflation premium of 3 percent would have meant that share of the fund invested in stock could have been expected to give an 8 percent nominal return.
If stock accounted for 70 percent of the fund, this would provide a return of 5.6 percentage points to the funds. If the remaining 30 percent of the fund had an average yield of 5 percent, then it would have provided a yield of 1.5 percentage points for a total yield of 7.1 percent. (It would have also been reasonable to include an adjustment for the expectation that stock prices would revert to their mean price-to-earnings ratio of 15.) Anyhow, the point is that an 8.0 percent return assumption would have been too high in 2007, it would not be today since the ratio of stock prices to trend earnings is close to its historic average of 15 to 1, meaning that stocks can be expected to provide their historic nominal rate of return which is close to 10 percent. (This is discussed at more length here and here.)
The second point is that implied preference in this piece for using the municipal bond interest rate for assessing liabilities would have mattered relatively little in this last decade. This rate, which averaged around 4.5 percent, also substantially exceeded pension fund returns in the economic crisis. In other words, whatever shortfall exists today in Detroit’s pension funds was not caused primarily by overly-optimistic return assumptions.
A NYT article on the fate of Detroit’s retired workers following its bankruptcy made reference to the pension funds’ assumption of an 8 percent return following its bankruptcy. There are two points worth making on this issue. First, it was an error to assume an 8 percent return in 2007 given the ratio of stock prices to trend earnings. At the time, that was over 20, which meant that stock could be expected to provide a real return of less than 5 percent going forward. Adding in an inflation premium of 3 percent would have meant that share of the fund invested in stock could have been expected to give an 8 percent nominal return.
If stock accounted for 70 percent of the fund, this would provide a return of 5.6 percentage points to the funds. If the remaining 30 percent of the fund had an average yield of 5 percent, then it would have provided a yield of 1.5 percentage points for a total yield of 7.1 percent. (It would have also been reasonable to include an adjustment for the expectation that stock prices would revert to their mean price-to-earnings ratio of 15.) Anyhow, the point is that an 8.0 percent return assumption would have been too high in 2007, it would not be today since the ratio of stock prices to trend earnings is close to its historic average of 15 to 1, meaning that stocks can be expected to provide their historic nominal rate of return which is close to 10 percent. (This is discussed at more length here and here.)
The second point is that implied preference in this piece for using the municipal bond interest rate for assessing liabilities would have mattered relatively little in this last decade. This rate, which averaged around 4.5 percent, also substantially exceeded pension fund returns in the economic crisis. In other words, whatever shortfall exists today in Detroit’s pension funds was not caused primarily by overly-optimistic return assumptions.
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I’m not kidding, but of course he gives us the economic equivalent telling readers:
“For most Americans, the economy is performing adequately, though obviously not spectacularly. Despite a woeful 7.6 percent unemployment rate, it remains true that 92.4 percent of workers have jobs (counting discouraged workers who’ve left the workforce would reduce this to about 90 percent). We have two distinct economies: one that inflicts acute pain on a minority of Americans but inspires mass political and media criticism; and another that creates huge wealth for the majority but is virtually ignored. Though distress is concentrated, unhappiness is widespread.”
Apart from the fact that the share of the population that is involuntary unemployed or underemployed would be at least 14 percent, this argument ignores the influence of unemployment on the wages of those who are working. High unemployment undercuts the bargaining power of workers, especially in the bottom half of the wage distribution. As a result, workers have gotten none of the benefits of productivity growth in the last five years. This might explain part of their unhappiness.
Samuelson does note growing insecurity, but seems to think it is a psychological problem rather than a rational response to the circumstances faced by most workers;
“Our Martian visitors would discover that America’s mass abundance is mixed with mass anxiety. There’s a broadly shared sense of vulnerability, which helps explain why discontent is not confined to the distressed. It also accounts for the view that the Great Recession and its aftershocks, unlike previous post-World War II slumps, constitute ‘an assault on the middle class.’ Perhaps continued recovery and more jobs will erase present doubts, though I suspect that any reversal will, at best, be partial because the recession’s psychological effects are pervasive.”
He then warns that we shouldn’t want the government to do anything about either growth (because he has decided it can’t despite all the evidence to the contrary) or insecurity, because that would only make things worse. He makes this point by warning about Europe:
“The experience in Europe, with more public protections and a darker economic outlook, teaches a similar lesson.”
Actually most of the countries in Europe with more public protections than the United States are doing just fine. The employment rate in Denmark, Sweden, Germany, Austria, and the Netherlands are all higher than in the United States. In fact, both Germany and Austria have higher employment rates today than they did before the downturn. The European countries that are in especially bad shape, Greece, Spain. Portugal and Ireland, had the least developed welfare states among the original 15 European Union countries.
Many EU countries did severely damage their economies by turning over the running of their central banks to the loon tunes at the European Central Bank, but that does not speak to the merits of their underlying system. This would be like saying a person had made a poor financial decision in becoming a doctor because she allowed Bernie Madoff to manage her money. The problem in both cases was who is managing the money.
Note: Typos corrected, thanks to Robert Salzberg.
I’m not kidding, but of course he gives us the economic equivalent telling readers:
“For most Americans, the economy is performing adequately, though obviously not spectacularly. Despite a woeful 7.6 percent unemployment rate, it remains true that 92.4 percent of workers have jobs (counting discouraged workers who’ve left the workforce would reduce this to about 90 percent). We have two distinct economies: one that inflicts acute pain on a minority of Americans but inspires mass political and media criticism; and another that creates huge wealth for the majority but is virtually ignored. Though distress is concentrated, unhappiness is widespread.”
Apart from the fact that the share of the population that is involuntary unemployed or underemployed would be at least 14 percent, this argument ignores the influence of unemployment on the wages of those who are working. High unemployment undercuts the bargaining power of workers, especially in the bottom half of the wage distribution. As a result, workers have gotten none of the benefits of productivity growth in the last five years. This might explain part of their unhappiness.
Samuelson does note growing insecurity, but seems to think it is a psychological problem rather than a rational response to the circumstances faced by most workers;
“Our Martian visitors would discover that America’s mass abundance is mixed with mass anxiety. There’s a broadly shared sense of vulnerability, which helps explain why discontent is not confined to the distressed. It also accounts for the view that the Great Recession and its aftershocks, unlike previous post-World War II slumps, constitute ‘an assault on the middle class.’ Perhaps continued recovery and more jobs will erase present doubts, though I suspect that any reversal will, at best, be partial because the recession’s psychological effects are pervasive.”
He then warns that we shouldn’t want the government to do anything about either growth (because he has decided it can’t despite all the evidence to the contrary) or insecurity, because that would only make things worse. He makes this point by warning about Europe:
“The experience in Europe, with more public protections and a darker economic outlook, teaches a similar lesson.”
Actually most of the countries in Europe with more public protections than the United States are doing just fine. The employment rate in Denmark, Sweden, Germany, Austria, and the Netherlands are all higher than in the United States. In fact, both Germany and Austria have higher employment rates today than they did before the downturn. The European countries that are in especially bad shape, Greece, Spain. Portugal and Ireland, had the least developed welfare states among the original 15 European Union countries.
Many EU countries did severely damage their economies by turning over the running of their central banks to the loon tunes at the European Central Bank, but that does not speak to the merits of their underlying system. This would be like saying a person had made a poor financial decision in becoming a doctor because she allowed Bernie Madoff to manage her money. The problem in both cases was who is managing the money.
Note: Typos corrected, thanks to Robert Salzberg.
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Tyler Cowan told NYT readers that he is concerned that one response to growing inequality might be a renewed push for wealth taxes. I have some sympathy for his position, not because I am concerned so much about the inefficiencies created in taxing wealth (those are not good), but you tend not to get the money.
Wealth can be pretty easy to hide. (Ever see a Picasso painting?) If we give people a large incentive to hide their wealth, it is reasonable to assume that they will. This means that we will get much less from a tax on the wealth of the rich than a simple arithmetic calculation would imply.
However there are other ways of getting wealth from the rich to everyone else, most importantly by reversing the policies that redistributed wealth upward. The patents held by Pfizer and other drug companies would be worth much less money if we had publicly financed drug research so that most, if not all, new drugs were sold at generic prices. If we didn’t allow monopoly prices by cable companies then people like Al Gore would not be able to pocket hundreds of millions of dollars from selling cable TV slots. And if we adopted policies to promote rather than obstruct full employment then ordinary workers would be able to get their share of productivity gains instead of having it all go to profits.
These, and other policies would reduce the income of the rich and therefore also their wealth. In fact, if we are bothered by wealth, a rise in interest rates would go far toward reducing the wealth of the rich, as well as the market value of national debts, since the value of government bonds held by the rich would plunge. (This is especially true in the case of Japan where many long-term bonds have been issued at interest rates of less than 1.0 percent. If the interest rate on 10-year bonds were to rise to 3.0 percent, the price of these bonds would be cut by close to 50 percent.
So, we need not worry about taxing wealth if we reverse the policies that have redistributed so much income upward over the last three decades.
Tyler Cowan told NYT readers that he is concerned that one response to growing inequality might be a renewed push for wealth taxes. I have some sympathy for his position, not because I am concerned so much about the inefficiencies created in taxing wealth (those are not good), but you tend not to get the money.
Wealth can be pretty easy to hide. (Ever see a Picasso painting?) If we give people a large incentive to hide their wealth, it is reasonable to assume that they will. This means that we will get much less from a tax on the wealth of the rich than a simple arithmetic calculation would imply.
However there are other ways of getting wealth from the rich to everyone else, most importantly by reversing the policies that redistributed wealth upward. The patents held by Pfizer and other drug companies would be worth much less money if we had publicly financed drug research so that most, if not all, new drugs were sold at generic prices. If we didn’t allow monopoly prices by cable companies then people like Al Gore would not be able to pocket hundreds of millions of dollars from selling cable TV slots. And if we adopted policies to promote rather than obstruct full employment then ordinary workers would be able to get their share of productivity gains instead of having it all go to profits.
These, and other policies would reduce the income of the rich and therefore also their wealth. In fact, if we are bothered by wealth, a rise in interest rates would go far toward reducing the wealth of the rich, as well as the market value of national debts, since the value of government bonds held by the rich would plunge. (This is especially true in the case of Japan where many long-term bonds have been issued at interest rates of less than 1.0 percent. If the interest rate on 10-year bonds were to rise to 3.0 percent, the price of these bonds would be cut by close to 50 percent.
So, we need not worry about taxing wealth if we reverse the policies that have redistributed so much income upward over the last three decades.
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The NYT has a nice piece on how Goldman Sachs has gotten into the aluminum business in a big way in recent years. The discussion of how it uses its control over inventories to jack up prices is fascinating. There are several interesting take-aways.
First, the piece suggests that the impact on price is limited (7 percent, if their estimates are right), but worth a huge amount given the volumes involved. This is what I had always assumed about the extent to which this sort of speculation can affect the price of products. Speculation might add 20-30 cents to the price of gas, but it can’t explain why we are paying $4.00 a gallon rather than $1.50 a gallon.
Second, there is nothing unique to financial firms that allow them to speculate in this way. Yes, Goldman Sachs has lots of money, but so does Alcoa and many other non-financial companies. If a company can corner the market in major commodities then it indicates a failure first and foremost of anti-trust regulation.
Third, this should reinforce the argument for a new Glass-Steagall. The guarantees provided by the FDIC and Fed to commercial banks reflect their unique importance in maintaining the system of payments in the economy. There is no reason that banks should be able to exploit these guarantees to assist themselves in raising the money needed to corner the aluminum market. If Goldman wants to speculate in aluminum then it should not be a bank holding company. That one should be a no-brainer, except for the corruption of the political system.
The NYT has a nice piece on how Goldman Sachs has gotten into the aluminum business in a big way in recent years. The discussion of how it uses its control over inventories to jack up prices is fascinating. There are several interesting take-aways.
First, the piece suggests that the impact on price is limited (7 percent, if their estimates are right), but worth a huge amount given the volumes involved. This is what I had always assumed about the extent to which this sort of speculation can affect the price of products. Speculation might add 20-30 cents to the price of gas, but it can’t explain why we are paying $4.00 a gallon rather than $1.50 a gallon.
Second, there is nothing unique to financial firms that allow them to speculate in this way. Yes, Goldman Sachs has lots of money, but so does Alcoa and many other non-financial companies. If a company can corner the market in major commodities then it indicates a failure first and foremost of anti-trust regulation.
Third, this should reinforce the argument for a new Glass-Steagall. The guarantees provided by the FDIC and Fed to commercial banks reflect their unique importance in maintaining the system of payments in the economy. There is no reason that banks should be able to exploit these guarantees to assist themselves in raising the money needed to corner the aluminum market. If Goldman wants to speculate in aluminum then it should not be a bank holding company. That one should be a no-brainer, except for the corruption of the political system.
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The Washington Post has a great piece on how the American Medical Association is able to inflate doctors’ pay by hugely exaggerating the amount of time that Medicare assumes is required for a wide range of medical procedures. This increases Medicare reimbursement rates as well as the reimbursement rates paid by private insurers.
The Washington Post has a great piece on how the American Medical Association is able to inflate doctors’ pay by hugely exaggerating the amount of time that Medicare assumes is required for a wide range of medical procedures. This increases Medicare reimbursement rates as well as the reimbursement rates paid by private insurers.
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The Post’s lead editorial on Detroit’s bankruptcy highlighted the role of pensions in the city’s finances. It warned readers that the problem of large unfunded pensions is common, telling readers:
“A new survey by scholars at Boston College finds that state and local pension plans have $3.8 trillion in unfunded liabilities, even assuming strong rates of return.”
Got that? $3.8 TRILLION in unfunded liabilities! Let’s see, I’ve $26.43 in my pockets, how does that compare? [See correction note — I was far too kind to the Post here.]
Okay, this is exactly the sort of irresponsible budget reporting that I wrote about yesterday. How many Post readers have any basis for assessing this $3.8 trillion unfunded liability figure?
It’s not hard to put this number in a context that would make it meaningful to readers. First, it is important to note that this estimate is over a 30-year period, the normal planning period for public pensions. It is also worth noting that the estimate is not based on an assumption of “strong rates of return.” Rather, the estimate assumes rates of return that are consistent with growth projections from the Congressional Budget Office and other forecasters.
If the Post wanted to make this number meaningful, the obvious point of reference would be projected GDP over this 30-year period. The discounted value of GDP over the next 30 years is roughly $447 trillion, which means that the estimated shortfall is a bit less than 0.9 percent of GDP. That’s hardly trivial, but not obviously a crushing burden either. Furthermore, many state and local governments are already contributing at rates that are consistent with filling this gap, meaning that no additional commitment of public funds will be needed to fill the shortfall, current levels of taxation are adequate.
The Post would have provided this information if the point was to inform readers. But that obviously was not the paper’s point. The Post’s point in this editorial was to scare readers to advance its agenda for cutting public pensions.
The Post’s lead editorial on Detroit’s bankruptcy highlighted the role of pensions in the city’s finances. It warned readers that the problem of large unfunded pensions is common, telling readers:
“A new survey by scholars at Boston College finds that state and local pension plans have $3.8 trillion in unfunded liabilities, even assuming strong rates of return.”
Got that? $3.8 TRILLION in unfunded liabilities! Let’s see, I’ve $26.43 in my pockets, how does that compare? [See correction note — I was far too kind to the Post here.]
Okay, this is exactly the sort of irresponsible budget reporting that I wrote about yesterday. How many Post readers have any basis for assessing this $3.8 trillion unfunded liability figure?
It’s not hard to put this number in a context that would make it meaningful to readers. First, it is important to note that this estimate is over a 30-year period, the normal planning period for public pensions. It is also worth noting that the estimate is not based on an assumption of “strong rates of return.” Rather, the estimate assumes rates of return that are consistent with growth projections from the Congressional Budget Office and other forecasters.
If the Post wanted to make this number meaningful, the obvious point of reference would be projected GDP over this 30-year period. The discounted value of GDP over the next 30 years is roughly $447 trillion, which means that the estimated shortfall is a bit less than 0.9 percent of GDP. That’s hardly trivial, but not obviously a crushing burden either. Furthermore, many state and local governments are already contributing at rates that are consistent with filling this gap, meaning that no additional commitment of public funds will be needed to fill the shortfall, current levels of taxation are adequate.
The Post would have provided this information if the point was to inform readers. But that obviously was not the paper’s point. The Post’s point in this editorial was to scare readers to advance its agenda for cutting public pensions.
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Mary Williams Walsh seriously misrepresented the issues in discussing the debate over the discounts rates that public pension plans should use in assessing their liabilities. The goal of any formula for funding pensions should be to maintain a relatively even flow of funds into the pension in order to avoid sharp disruptions to government budgets.
The formula that pension funds typically use, which involves a smoothing process and discounts liabilities based on the expected rate of return of assets accomplished this purpose. An analysis based on the last 110 years of financial market fluctuations shows that this method rarely leads to sharp changes in the amount of required contributions. (It is important that the expected rate of return be adjusted with price to earnings ratios in the stock market. Many pension funds absurdly assumed that equities could provide a 10 percent rate of return in the 1990s stock bubble, even as price to earnings ratios crossed 30.)
By contrast, the discount formula clearly advocated in this piece would lead to sharp fluctuations in required contributions, assuming that pension funds continued to invest in stocks. This discount formula would require state and local governments to make large contributions to their pensions so that they could be fully funded using the risk free interest rate to assess liabilities, then they would be able to maintain minimal levels of payments since most of the contributions would come from the excess of the return on the fund’s assets over the assumed discount rate.
This would be similar to building up a large trust fund to pay for education in future years so that people could pay lower taxes two or three decades from now since the cost of the schools would be paid out of the trust fund. While that may be a nice thing to do, it would mean higher than necessary taxes on current workers. This is the predicted outcome of the discount method advocated in this piece assuming that pension investment patterns do not change.
Of course if the riskless discount rate was chosen as the basis for assessing these funds, then it is likely that pension managers would change their investment behavior and stop investing in stocks. There is no doubt that stock is a risky asset that provides far more volatile returns than bonds. If pensions are not allowed to factor in the increased return from stocks in assessing their financial state, there would be no reason for a pension fund manager to invest in them.
By investing in stock, pension fund managers would be taking the risk that a downturn will leave the pension plan appearing underfunded. This means that they would face the downside risk, but get none of the upside benefit. The likely outcome in this case would be that pensions would invest almost entirely in bonds or other low-yielding assets.
This would lead to an absurd situation in which collectively invested pension funds are held in safe assets, while individuals hold risky stock in their 401(k)s or other retirement accounts. These implications should have been clearly explained in any discussion of the choice of discount rates.
Mary Williams Walsh seriously misrepresented the issues in discussing the debate over the discounts rates that public pension plans should use in assessing their liabilities. The goal of any formula for funding pensions should be to maintain a relatively even flow of funds into the pension in order to avoid sharp disruptions to government budgets.
The formula that pension funds typically use, which involves a smoothing process and discounts liabilities based on the expected rate of return of assets accomplished this purpose. An analysis based on the last 110 years of financial market fluctuations shows that this method rarely leads to sharp changes in the amount of required contributions. (It is important that the expected rate of return be adjusted with price to earnings ratios in the stock market. Many pension funds absurdly assumed that equities could provide a 10 percent rate of return in the 1990s stock bubble, even as price to earnings ratios crossed 30.)
By contrast, the discount formula clearly advocated in this piece would lead to sharp fluctuations in required contributions, assuming that pension funds continued to invest in stocks. This discount formula would require state and local governments to make large contributions to their pensions so that they could be fully funded using the risk free interest rate to assess liabilities, then they would be able to maintain minimal levels of payments since most of the contributions would come from the excess of the return on the fund’s assets over the assumed discount rate.
This would be similar to building up a large trust fund to pay for education in future years so that people could pay lower taxes two or three decades from now since the cost of the schools would be paid out of the trust fund. While that may be a nice thing to do, it would mean higher than necessary taxes on current workers. This is the predicted outcome of the discount method advocated in this piece assuming that pension investment patterns do not change.
Of course if the riskless discount rate was chosen as the basis for assessing these funds, then it is likely that pension managers would change their investment behavior and stop investing in stocks. There is no doubt that stock is a risky asset that provides far more volatile returns than bonds. If pensions are not allowed to factor in the increased return from stocks in assessing their financial state, there would be no reason for a pension fund manager to invest in them.
By investing in stock, pension fund managers would be taking the risk that a downturn will leave the pension plan appearing underfunded. This means that they would face the downside risk, but get none of the upside benefit. The likely outcome in this case would be that pensions would invest almost entirely in bonds or other low-yielding assets.
This would lead to an absurd situation in which collectively invested pension funds are held in safe assets, while individuals hold risky stock in their 401(k)s or other retirement accounts. These implications should have been clearly explained in any discussion of the choice of discount rates.
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Sorry folks, I committed the cardinal sin of accepting an assertion from a Washington Post editorial without carefully checking it myself. This morning the Post’s lead editorial used the occasion of Detroit’s bankruptcy to beat up on public sector pensions. The Post told readers:
“A new survey by scholars at Boston College finds that state and local pension plans have $3.8 trillion in unfunded liabilities, even assuming strong rates of return.”
I did actually check the study and saw the chart showing $3.8 trillion in liabilities. I then wrote up my blog post accordingly, pointing out how large $3.8 trillion was in the context of the next 30 years’ GDP, the planning horizon for pensions.
But I apparently forgot to think about this number for the necessary 10 seconds before writing. The $3.8 trillion figure should have struck me as way too large for an estimate for unfunded liabilities, and in fact it is. Here’s what the Boston College study said (page 2):
“In the aggregate, the actuarial value of assets amounted to $2.8 trillion and liabilities amounted to $3.8 trillion, producing a funded ratio of 73 percent.”
You see, the $3.8 trillion figure was an estimate of total liabilities, not unfunded liabilities. Since the pensions have $2.8 trillion in assets, their unfunded liabilities are just $1 trillion. Or, to put this in terms that may be understandable to Post readers, the unfunded liabilities are 0.22 percent of projected GDP over the next 30 years. And, as I noted in my earlier post, most state and local governments are already funding at levels that are consistent with making up this shortfall so there will no required tax increases or spending cuts to meet these future obligations.
So I apologize for accepting the Post’s $3.8 trillion figure for unfunded liabilities without looking more closely. Clearly the Post has an agenda to weaken or end public sector pensions and is perfectly happy to use bad numbers to accomplish this goal.
Addendum: The Post added a correction some time on Monday.
Sorry folks, I committed the cardinal sin of accepting an assertion from a Washington Post editorial without carefully checking it myself. This morning the Post’s lead editorial used the occasion of Detroit’s bankruptcy to beat up on public sector pensions. The Post told readers:
“A new survey by scholars at Boston College finds that state and local pension plans have $3.8 trillion in unfunded liabilities, even assuming strong rates of return.”
I did actually check the study and saw the chart showing $3.8 trillion in liabilities. I then wrote up my blog post accordingly, pointing out how large $3.8 trillion was in the context of the next 30 years’ GDP, the planning horizon for pensions.
But I apparently forgot to think about this number for the necessary 10 seconds before writing. The $3.8 trillion figure should have struck me as way too large for an estimate for unfunded liabilities, and in fact it is. Here’s what the Boston College study said (page 2):
“In the aggregate, the actuarial value of assets amounted to $2.8 trillion and liabilities amounted to $3.8 trillion, producing a funded ratio of 73 percent.”
You see, the $3.8 trillion figure was an estimate of total liabilities, not unfunded liabilities. Since the pensions have $2.8 trillion in assets, their unfunded liabilities are just $1 trillion. Or, to put this in terms that may be understandable to Post readers, the unfunded liabilities are 0.22 percent of projected GDP over the next 30 years. And, as I noted in my earlier post, most state and local governments are already funding at levels that are consistent with making up this shortfall so there will no required tax increases or spending cuts to meet these future obligations.
So I apologize for accepting the Post’s $3.8 trillion figure for unfunded liabilities without looking more closely. Clearly the Post has an agenda to weaken or end public sector pensions and is perfectly happy to use bad numbers to accomplish this goal.
Addendum: The Post added a correction some time on Monday.
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