Re-Indexing Public Pensions

By James Kwak In the wake of the Detroit bankruptcy, Paul Krugman has a post pooh-poohing concerns about public pensions. His conclusion: “Nationwide, governments are underfunding their pensions by around 3 percent of $850 billion, or around $25 billion a year. A $25 billion shortfall in a $16 trillion economy. We’re doomed!” (Yes, that’s sarcasm.)

Yale economist and Nobel laureate Robert Shiller is warning about the consequences of waiting too long to address rising income inequality.

Last week, when the Congressional Budget Office released a report saying that Obamacare's insurance subsidies would reduce people's inclination to work, liberals celebrated this as a victory over "job lock." And I agree: tying health insurance to work makes people more inclined to work, but that's not necessarily a good thing.

It is no surprise that pension funds in the US are significantly underfunded (median 72% funded). California Public Employees’ Retirement System (CALPERS), specifically, is about 26% short of meeting its long-term commitments. Like most major pension funds, it uses smoke-and-mirrors to avoid this yawning gap by smoothing over a long enough timeframe where 'hope' for growth in assets triumphs over the reality of liabilities (through a 'rolling' 15- or 30-year window - that therefore never comes due).

In this short piece, Robert Shiller explains one of the basic ideas of his work on macro markets:

On Monday, Spain reported that its debt-to-GDP ratio would hit 100% in 2014. Spain's public debt will soar to nearly 100 percent of output at the end of 2014, the government said Monday, despite massive spending cuts that have triggered angry street protests.