How bad is the state pension funding mess?

Dean Baker says not so bad; Kevin Drum, Paul Krugman, and others seem to take his side.  Josh Barro says it's bad.  I side with Barro.  Here is one Baker passage:

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.

Beware of the 30-year comparison I say.  A lot of sums look small compared to thirty years' worth of output.  I worry when I read sentences such as this:

The major reason that shortfalls exist at all was the downturn in the stock market following the collapse of the housing bubble, not inadequate contributions to pension funds.

In my house, that's what inadequate means.  I also see Baker relying on a dangerous version of an equity premium argument, when I'd rather see a probability distribution of scenarios.  I don't see Baker — not once — analyzing the public choice considerations of how state governments actually behave and treat their finances.  Or how about how state voters hate tax increases, reasonably or not, and think their governments should be forced to actually solve their mismanagement problems?  A crisis usually is an institutional crisis.

Here is a typical passage from the Barro piece:

New York taxpayers have learned about these dangers the hard way. There is a reason that the pension fixes enacted in 2009 were called “Tier V” and not “Tier II”: There had been three previous attempts to rein in the excessive cost of New York’s public-employee pensions by creating less generous pension “tiers” for newly hired employees. These reforms date back to the fiscal crisis of the 1970s, when unsustainably generous contracts with public-employee unions threatened to throw New York City into bankruptcy. Since then, though, New York’s public-worker unions have been highly successful in unwinding previously enacted pension reforms. The new Tier V is nearly identical to what Tier IV was at the time of its enactment in 1983–but Tier IV has been repeatedly, and retroactively, sweetened through increases in benefit formulas, cuts to employee contributions, and reductions in the retirement age. Similarly, by the time substantial numbers of workers actually start retiring under Tier V around 2040, this plan, too, will probably bear little resemblance to its current form.

Most of Barro's piece focuses on public choice considerations — of how state and local government institutions actually work — and thus it is the better analysis.  Here is a related piece by Eileen Norcross, closer to Barro than to Baker.


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