Today's N&O runs a front-page story about retirement benefits for state and local government workers which can best be summed up as "What? Me Worry?" The article notes that pensions account for a mere three percent of budgets, which is close to what the private sector spends. The pensions are 78% funded, which on the surface looks ok, or at least no worse that Social Security.
Bill Gates sees things a bit differently, as reported in WSJ and his Gates Notes website, emphasizing accounting gimmicks that are being used to vastly underestimate the true cost of future benefits. Gates has been looking at this issue carefully for over a year because he sees burgeoning benefit obligations crowding out future spending on education. He has been advised by a number of top experts on pensions (including my NC State colleague Bob Clark) and has picked up on the key concerns: failure to make sufficient contributions, unrealistically high interest rate assumptions (which make future costs look unrealistically low), and the real ticking-time-bomb of retiree health insurance. Of course none of this is mentioned by the N&O, which confuses what state and local governments are currently spending with what they should be spending if they are going to meet future obligations.
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What's going on with inflation?
2 years ago
Unfortunately, this is a very serious issue that is pretty much ignored because the definition of whether a pension fund is fully funded is based on flawed assumptions as Gates (and many others note).
ReplyDeleteOur Bob Clark directed me to an excellent paper by Josh Rauh on the topic. I posted a summary on my blog here..
http://financeclippings.blogspot.com/2010/10/state-pension-fund-return.html