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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.

Suggested Citation

  • Dean Baker, 2011. "The Origins and Severity of the Public Pension Crisis," CEPR Reports and Issue Briefs 2011-04, Center for Economic and Policy Research (CEPR).
  • Handle: RePEc:epo:papers:2011-04
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    File URL: http://www.cepr.net/documents/publications/pensions-2011-02.pdf
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    References listed on IDEAS

    as
    1. Munnell, Alicia H. & Aubry, Jean-Pierre & Quinby, Laura, 2011. "Public pension funding in practice," Journal of Pension Economics and Finance, Cambridge University Press, vol. 10(02), pages 247-268, April.
    2. Dean Baker, 2002. "The Run-up in Home Prices: A Bubble," Challenge, Taylor & Francis Journals, vol. 45(6), pages 93-119.
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    More about this item

    Keywords

    pension funds; pensions;

    JEL classification:

    • H - Public Economics
    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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