The Public Pension Battle: Beware the Economists

We have all heard the tales of public pension requirements that are driving various versions of government into bankruptcy. Figures in the trillions of dollars are thrown around as values for the encumbered debt. The Economic Policy Institute has produced a paper by Monique Morrissey titled Discounting Public Pensions. In it, she claims that the pension funding is in much better shape than ideologically driven politicians and economists would have you believe.


The term “discounting” refers to the manner in which future requirements for funds are matched to projected income and earnings on investments. At issue is the method for projecting earnings on investments. Republicans and their economist allies wish to force public pensions to project earnings at the most conservative value possible, rather than at the most likely value. Most pensions have diverse stock and bond holdings. The new approach would force pension managers to assume a yield based on Treasury Bonds. The net effect of this is to make public pensions appear to be grossly underfunded, and to require much greater public expense to make up the difference.

“Instead of using Treasury yields to assess the adequacy of pension reserves, public fund managers assume their funds will earn a long-run rate of return of around 8% in nominal terms. This is slightly less than the roughly 9% return these funds have averaged over the past 25 years....but it is much higher than the yield on longer-term Treasury bonds, currently around 3.5% for 10-year bonds and 4.5% for 30-year bonds.”

“The Government Accounting Standards Board (GASB) calls for public pensions to use a discount rate ‘based on an estimated long-term investment yield for the plan, with consideration given to the nature and mix of current and expected plan investments’ (GASB 1994).”

Using the currently accepted standards for future projections, Morrissey arrives at this result.

“Public pensions now have an estimated $700 billion in unfunded liabilities.... According to the Center for Retirement Research, public pensions last year had around 78% of what they needed set aside to pay for pension benefits....To make up the difference, state and local governments would have to devote about 5% of their budgets to pension contributions over the next 30 years, up from under 4% today, assuming an average 8% return on fund assets.”

“This is a significant bump, but hardly untenable, especially for the majority of state and local governments that have kept up with their pension fund contributions. (The average funding ratio and required contribution cited above includes a few states like California, Illinois, and New Jersey that short changed some or all of their pension funds over many years.) Nor is such an increase unprecedented: State pension contributions were around 6% before the long bull market that began in the mid-1980s.”

What would be the effect of applying the more “conservative” earnings projections?

“Conservative critics, however, have gotten considerable political mileage from claims that public pensions’ unfunded liabilities are in the many trillions, two to six times larger than the conventional measures based on pension reporting, which hover around $700 billion. Under their scenario, required contributions could double or more, thus imposing an enormous burden on taxpayers....Their arguments hinge on assumptions that current and future pension fund investments will earn historically low rates-of-return going forward.”

One might be deceived into thinking that this “conservative” approach is designed to make wise use of public funds, but that would be a grave mistake. The Republican legislators and their Republican economist allies have made it clear by their actions that they have two goals: the first is to punish public unions for supporting Democratic candidates, and the second is to destroy all unions, both public and private.


There are many issues worth discussing relevant to this topic. Projecting investment earnings many years in advance is a risky business and some degree of conservatism is warranted. What we have on the table now is not a discussion of sound accounting principles, but a threat of the imposition of an ideology on our public workers.