David Leonhardt on the state pension shortfall

This is exactly right:

But 8 percent [equity returns] still seems like an aggressive assumption for state and local governments to be making.

If state and local governments instead assumed a future return of 7 percent, their funding gap would nearly double, to $1.3 trillion, according to Alicia Munnell and her colleagues at the Boston College retirement center. If they assumed a 6 percent return, the funding gap grows to $1.8 trillion.

Even if you believe – as I do – that government workers are not grossly overpaid, you can see that states and local governments have not set aside nearly enough money for their employees’ retirement.

Here are related comments from Ezra Klein, though I see less agreement than he does.  Here is Baker, writing on social security privatization (see point seven), claiming we can expect rates of return on the stock market of four to five percent, not the seven to eight percent in the municipal context.


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