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InsiderOnline Blog: February 2013

Public Pensions Cost More than You Might Think

Are defined-benefit public pension systems overly generous compared to the defined-contribution systems typical of the private sector? Defenders of the status quo say no, but they’re using a number of fallacious talking points to make their case. Jason Richwine runs those down in a new Heritage Foundation paper.

In the first place, observes Richwine, the real cost of public pensions is greater than what governments have been contributing to the pension funds. When plans’ assumed rates of return are adjusted to account for the risk that plan assets will not achieve those returns, many pension funds are revealed to be significantly underfunded. Defenders of the practice insist that “[s]ince governments (unlike individuals) are multi-generational entities, year-to-year deviations from the expected return are likely to average out,” which “means that the risk of underperforming expectations in the long run approaches zero.” But that’s only part of the story, says Richwine:

Although lower-than-expected annual returns become less likely over time, the effect of compounding enhances the negative impact of such lower returns if they occur. The cumulative return on an investment therefore exhibits continued volatility over time, and governments cannot claim to eliminate risk on their own investments by being long-lived.

Another common fallacy in defense of public pensions: Generous pensions are justified because public employees do not participate in Social Security. But they also don’t have to pay Social Security taxes. Observes Richwine:

Since most public employees fall into the middle-income range, it is generally a benefit for them to be exempt from participating in Social Security. Instead of contributing to Social Security, they contribute to a public pension where benefits per dollar of contributions are much greater.

For more, see: “Nine Fallacies Used to Defend Public Sector Pensions,” by Jason Richwine, The Heritage Foundation, February 5.

Posted on 02/08/13 01:16 PM by Alex Adrianson

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