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The Origins and Severity of the Public Pension Crisis

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  • Dean Baker

Abstract

There has been considerable attention given in recent months to the shortfalls faced by state and local pension funds. Using the current methodology of assessing pension obligations, the shortfalls sum to nearly $1 trillion. Some analysts have argued that by using what they consider to be a more accurate methodology, the shortfalls could be more than three times this size. Based on these projections, many political figures have argued the need to drastically reduce the generosity of public sector pensions, and possibly to default on pension obligations already incurred. This paper shows: 1) Most of the pension shortfall using the current methodology is attributable to the plunge in the stock market in the years 2007-2009. 2)The argument that pension funds should only assume a risk-free rate of return in assessing pension fund adequacy ignores the distinction between governmental units, which need be little concerned over the timing of market fluctuations, and individual investors, who must be very sensitive to market timing. 3) The size of the projected state and local government shortfalls measured as a share of future gross state products appear manageable.

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Bibliographic Info

Paper provided by Center for Economic and Policy Research (CEPR) in its series CEPR Reports and Issue Briefs with number 2011-04.

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Length: 18 pages
Date of creation: Feb 2011
Date of revision:
Handle: RePEc:epo:papers:2011-04

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Keywords: pension funds; pensions;

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  1. Alicia H. Munnell & Jean-Pierre Aubry & Laura Quinby, 2010. "Public Pension Funding in Practice," NBER Working Papers 16442, National Bureau of Economic Research, Inc.
  2. Dean Baker, 2002. "The Run-up in Home Prices: A Bubble," Challenge, M.E. Sharpe, Inc., vol. 45(6), pages 93-119, November.
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