jump to navigation

Why Are Public Pension Funds Special? July 16, 2009

Posted by federalist in Pensions.
trackback

Terrance Slattery, President of the National Association of State Retirement Administrators, protests criticism of public pension plans’ refusal to mark their funding levels using the rigorous actuarial standards accepted in the private sector. He correctly notes what makes public pension funds different: “their sponsoring entities [i.e., taxpayer-funded governments] are going concerns, not subject to takeover or going out of business.” But this is precisely why they must be held to high accounting standards. Politicians and public employee unions have every incentive to encourage wildly optimistic actuarial assumptions: Current costs of pension benefits look cheaper, and if the future isn’t as rosy as they project then taxpayers are still on the hook for paying their full benefits. Heads they win, tails taxpayers lose.

Advertisements

Comments»

1. federalist - October 13, 2009

Andrew Biggs has a good explanation of “The Real Problem with Public Employee Pensions,” adding:

[W]hile public pensions discount their future obligations at the “expected return” on their investments, this doesn’t mean we can actually expect those assets to meet their goals. The reason is that funds take as the expected return the average return on the asset classes they hold, and the average return is always higher than the median or typical return.

[T]here is a good case that public pension funds should use lower discount rates than corporate pensions because public pension benefits are a safer asset for the beneficiary and thus a more binding obligation on the pension plan. Corporate pension benefits are not fully guaranteed if the sponsor goes bankrupt, while in most states accrued public pension benefits are treated as a binding obligation. In many states these benefits are guaranteed in state constitutions. If these pension obligations are as binding as state government bonds, it makes sense to discount them at the same rates.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: