At Public Sector Inc., Josh Barro has written a thorough post on Dean Baker’s defense of defined benefit public pensions. He begins his post with a thought experiment:

Baker contends that the government can create much value by assuming investment risk for its employees’ retirement savings. I think this claim is wrong. But before I explain why, let’s do a thought experiment about what it would mean for it to be right.
If Baker is right, public pensions are not merely sustainable; they are an amazing value creation machine that should be expanded as much as possible. If the government can achieve equity-like returns without concern about risk, why shouldn’t the government invest as much money in equities as it can, and finance those investments by issuing safe securities to more risk-averse individuals?

This is actually a view held by some of my friends on the left, and I found Josh’s critique of it clarifying and informative:

[T]he risk is that the long-term economic growth trend could be lower than consensus estimates by CBO and other economic observers. If this happens, taxpayers will be faced with a triple whammy: pension fund assets will underperform, creating larger unfunded liabilities to be closed with tax dollars; tax receipts will be weak, making it harder for states to appropriate funds to close those gaps; and incomes will be lower, making tax increases more painful.
Of course, the opposite outcome is possible: the economy could overperform in the long term, meaning that pension shortfalls would be smaller than expected, tax receipts more robust, and incomes higher. But this is not a wash: the first scenario involves a fiscal hole forming when we can least afford to close it, while the second would give us a windfall when it is least needed. Which is to say, public pensions are shielding public employees from long-term market risk, but only because it is being shifted to taxpayers.
Baker does not address this risk in his paper (and neither did the Center on Budget and Policy Priorities in January). But this is the key to the argument that pension discount rates are inappropriately high. Proponents of market-value discounting need not argue that pension funds will achieve a lower average long-range return than they currently project. Our argument is simply that, no matter how far you stretch the horizon, there is risk that the funds will fail to achieve our best ex-ante estimate for performance–and taxpayers are insuring over that risk. [Emphasis added]

The entire post is well worth reading, and it has bearing on broader debates on the notion of a “risk shift.” Shifting risk from current households to future taxpayers doesn’t eliminate risk. To be sure, it’s far from obvious that we’ve hit the right balance of burdens, which is why I’m open to expanding the public role in securing something like near-universal high-deductible insurance coverage while I’m for shrinking it in many other domains.