Origins of the So-Called Pension Crisis

March 09, 2011

Economist Dean Baker

Noted economist Dean Baker has written what could be best described as the definitive explanation of the state of public sector pension plans. In it, Baker explains that the cause of pension funding challenges is not benefit payments or benefit increases, but the significant decline in the stock market during 2008 and 2009. Although this is obvious to those familiar with the operation of public pension plans, Baker’s conclusion is both well-documented and well-explained.

Baker also provides a remarkably clear explanation of the hyper-technical issues involved in the “discount rate” debate. During the past year a number of right-wing pundits and economists have argued that public pension plans are engaging in accounting gimmickry to hide the “real” status of their funding.

Baker points out that this thinking is in error both as a matter of theory and in practical application. He believes pension funds may appropriately rely on the fact that they will continue to earn returns of approximately 8% per year and that state and local governments can easily withstand short term fluctuations in investment returns.

Finally, Baker agrees with those of us at AFSCME who believe that America is not a nation in decline where wealth is becoming a scarce commodity. He argues that our pension funding shortfalls, as a percentage of our entire economy, is rather small and the challenge of funding our pensions is manageable in the long term.

Baker’s paper, "The Origins and Severity of the Public Pension Crisis" is a welcome addition to the ongoing debate about pensions and their sustainability.  It is a must-read for public finance and pension fund observers and can be found on the Center for Economic and Policy Research website.

For more on state pensions, see the new state-by-state fact sheets available on AFSCME.org.