Re-Indexing Public Pensions

Retirement security has been a central focus of the labour movement for more than a century. But just as times have changed, so have the challenges for today’s retirees.

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.)

Guaranteed lifetime income has become the obsession of retirees, policymakers and the financial industry. Yet as the public pension debacle in bankrupt Detroit shows, we may never find a solution that completely eliminates the risk of your money running out.

Guaranteed lifetime income has become the obsession of retirees, policymakers and the financial industry. Yet as the public pension debacle in bankrupt Detroit shows, we may never find a solution that completely eliminates the risk of your money running out.

"Despite the robust investment returns since 2004, annual growth in unfunded pension liabilities has outstripped these returns," Moody's warns in its latest report on the state of public pension systems. As Bloomberg reports, the 25 biggest systems by assets averaged a 7.45% return from 2004 to 2013, but liabilities tripled over the same period leaving them facing a $2 trillion shortfall as investment returns can’t keep up with ballooning obligations.

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).