The Corner

A Defense of ‘Pensions Aren’t the Problem’

I’m a little surprised by the minor firestorm my modest collection of widely accepted statistics about state pension funds has ignited. Certainly, many states do have severe pension liability problems and I’ve never denied that.

That said, several of Veronique de Rugy’s contentions are flatly wrong. First, I don’t argue that “all is peachy in the state pension world.” In fact, in my Weekly Standard article I specifically argue that states should work to cut current pension benefits and say that several state pension funds face huge, perhaps unplayable liabilities.

I wrote:

This doesn’t mean that states like California that allow office workers to retire at full salary at age 50, encourage “double dipping” (letting employees collect more than one state pension, as happens in Florida) or calculate pensions in ways that guarantee employees retirement incomes higher than their working salaries should continue doing so.

Second, I haven’t changed my position on the fiscal peril that states face. As my article, which leads with an example of a system likely to go broke before 2020, clearly acknowledges, more than half a dozen state pension funds and countless local pension systems will likely run out of cash within the next few years absent major, job-killing tax increases. This will probably result in some municipal bankruptcies. But these problems are not universal.

More importantly, it makes little sense use a 4 percent discount rate for pension liabilities. The best way to calculate the likely return on any broad asset is to look at its historical return. State pension funds largely hold stocks that, on average, have gained about 8 percent a year. If roughly 8 percent return predictions were horribly off base, then states without current deficits in their pension funds would be unable to pay current benefits. No state has such a problem. A return of about 8 percent a year is similar to what most private pension plans, diversified “target date” retirement funds, and the like have achieved in the long run. Indeed, as long as states’ overall populations grow, they can pursue slightly more aggressive investment strategies than a person with an individually owned retirement account since they don’t face a single retirement date or need to switch to an all fixed-income portfolio right before retirement. If the overall stock market return falls significantly below 8 percent per year over a 30 to 40 year period, then it will reflect a variety of severe economic problems. It’s true that states won’t be able to pay pension benefits then, but they won’t be able to pay any of their other bills either. Assuming a 4 percent rate of return when historical patterns and actual holdings suggest a much higher one, in short, is an example of elevating academic parlor games above real world practice.

Most states do face reasonably serious budget problems that are driven to a large extent by employee compensation costs. Pensions are part of those costs and deserve some attention. In many cases, however, it’s easier and better to look at other benefits — health care, wages, and collective-bargaining monopolies — than it is to focus the amount of attention that’s being paid to pensions.

Eli Lehrer — Eli Lehrer is president and co-founder of the R Street Institute, a free-market think tank. He oversees R Street’s central headquarters in Washington, D.C., as well as its field offices in ...

Most Popular


In Defense of the Electoral College

Senator Elizabeth Warren has joined a growing chorus within the Democratic party in calling for the abolition of the Electoral College. Speaking at a forum in Mississippi on Monday night, Warren said that she hoped to ensure that “every vote matters” and proposed that “the way we can make that happen is ... Read More

Stick a Fork in O’Rourke

If, as I wrote last week here, Joe Biden may save the Democratic party from a horrible debacle at the polls next year, Beto O’Rourke may be doing the whole process a good turn now. Biden, despite his efforts to masquerade as the vanguard of what is now called progressivism, is politically sane and, if ... Read More
National Security & Defense

In Defense of the Iraq War

Today is the 16th anniversary of the invasion of Iraq, and Twitter is alive with condemnations of the conflict -- countered by precious few defenses. Yet I believed the Iraq War was just and proper in 2003, and I still believe that today. When Donald Trump condemned the war during the 2015 primary campaign and ... Read More

Beto-mania and Our Cult of Personality Politics

Robert “Beto” O’Rourke’s biggest fans and supporters insist he is a forward-thinking, future-oriented visionary, but no contender for the Democratic nomination feels more familiar than the former three-term congressman from El Paso. That’s because he has the highest combined score in both déjà vu ... Read More