The Pension Disaster That Wasn't

Via Paul Krugman, Dean Baker explains why the scary, scary pension time bomb is a dud. Says Krugman:

The basic moral is that the official story these days — of years and years of huge giveaways to unions, resulting in gigantic, unpayable debts — is just wrong: to a very large extent, the pension shortfall has emerged just since 2007, thanks to the financial crisis, and even then it’s not nearly as big relative to future state incomes as widely imagined. Here’s a key figure:

It puts an entirely different light on the situation. Whaddya know, we’re being sold a bill of goods.

I'm no economist, but even I can see what's going on here. As Baker explains:

Most of the pension shortfall using the current methodology is attributable to the plunge in the stock market in the years 2007-2009. If pension funds had earned returns just equal to the interest rate on 30-year Treasury bonds in the three years since 2007, their assets would be more than $850 billion greater than they are today. This is by far the major cause of pension funding shortfalls. While there are certainly cases of pensions that had been under-funded even before the market plunge, prior years of under-funding is not the main reason that pensions face difficulties now. Another $80 billion of the shortfall is the result of the fact that states have cutback their contributions as a result of the downturn. [emphasis mine]

Now, this in no way excuses the chronic underfunding of the NJ pension system. But neither does it call for the immoral trashing of promises made to workers in lieu of higher wages up front.

The size of the projected state and local government shortfalls measured as a share of future gross state products appear manageable. The total shortfall for the pension funds is less than 0.2 percent of projected gross state product over the next 30 years for most states. Even in the cases of the states with the largest shortfalls, the gap is less than 0.5 percent of projected state product. 

TABLE 2  Funding Levels and Liabilities for Major State Pension Funds
State	Plan	Actuarial Funding Ratio  (percent)	Actuarial Value  of Assets  (thousand $)	Liabilities  (thousand $)	Unfunded Accrued Liability  (thousand $)	Unfunded Liability as a percent of Future State Income	Latest  Actuarial Valuation Date

NJ	New Jersey Teachers	65.0	34,708,001	53,418,429	18,710,428	0.13%	6/30/2009
NJ	New Jersey PERS	64.9	28,879,176	44,470,403	15,591,227	0.11%	6/30/2009
NJ	New Jersey Police & Fire	70.7	22,937,838	32,442,101	9,504,263	0.07%	6/30/2009

If I read this right, the unfunded liability of these three main NJ pensions is about 0.3% of the future economy. You're telling me we can't cover that?

It's been a while since I brought this up, but take a look at the Tax Expenditure Report for 2010 (aren't we due soon for a new one)? Billions and billions in tax breaks to make us "more competitive." But we can't cover this?

Seriously?