Public Pension Shortfalls Misrepresented in Budget-Crisis Debate

Center for Economic and Policy Research (CEPR)

Washington, D.C.– With many state governments facing budget shortfalls this year along with dwindling federal assistance, some policy-makers have begun to call for drastic reductions of public sector pensions as a way to ease state budget woes. A new report from the Center for Economic and Policy Research (CEPR) puts this issue into better perspective, clearing up many common misconceptions about these funds.

The report, “The Origins and Severity of the Public Pension Crisis,” shows that the main reason public pension shortfalls exist at all is the downturn in the stock market following the housing crash in 2007-2009, not inadequate contributions. The paper demonstrates that if pension funds had just earned returns equal to the interest rate on 30-year Treasury bonds since 2007, their assets would be more than $850 billion greater than they are today.

“Much of the recent discussion of public pensions is misleading,” said Dean Baker, a co-director at CEPR and author of the report. “The shortfalls represent a small percentage of each state’s economy and, barring another sudden reversal of the stock market, are manageable.”

The paper looks at three main issues: the origins of the shortfall; whether public pension funds need to be as risk averse in assessing rates of return as individual investors; and the actual scope and size of the pension shortfalls relative to future state income.

Upon closer inspection of these issues, it is clear that public pension shortfalls have been misrepresented in public debates and will prove a reliable source of retirement income for future retirees without bankrupting state governments.

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