The New York Times’ recent article “A Sour Surprise for Public Pensions: Two Sets of Books” was remarkably incisive in exposing a scam multiemployer (union) plans have been using for decades in valuing pension liabilities at different rates for different purposes but there was pushback at the time and more from Alicia Munnell yesterday admitting that this is a complex issue and concluding that “[a]rticles like ‘Sour Surprise,’ however, do not help the process one iota.”
Ms. Munnell is dangerously mistaken on both counts.
- Selecting interest rates for public plans is as simple as it gets. Actuaries are told what rates to go with it and it is up to them to justify the use of those rates using jargon as arcane as necessary.
- Exposing the actuarial profession’s capture by their clients is an essential first step in explaining how pension plans got to 30% funded ratios (both for public and multemployer plans). What is not helpful is analysis like this:
“Determining funding contributions is a trickier issue. Academic models suggest the calculation should use a riskless rate. But contributing based on the riskless rate while investing part of the portfolio in equities produces ever growing funded levels. That outcome may sound great, but one of two things will happen. Politicians will raise benefits, increasing the commitments of public plans. Or they will reduce the contributions for successive generations, creating serious equity issues.”
A little thought here:
- Going to a riskless rate would require about 99.99% of plans to start paying off huge unfunded liabilities over decades. Is it benefit increases in 2055 that Ms. Munnell fears?
- Has any politician ever uttered the phrase: “I know the actuaries tell us to put in $2 billion but, dammit, think of grandkids, let’s put in $5 billion.”?
What Ms. Munnell has attempted to do is cut off a perfectly legitimate line of questioning with specious reasoning designed to maintain the status quo.