Accounting, Politics and Public Pensions in the US

The latest issue of Accountancy, Business and the Public Interest, Vol. 16, p. 87-107 includes a paper that begins:

This paper reviews the political rationale of public pensions and implicates the accounting profession in facilitating the accumulation of public pension debt through complex technical jargon and flexible reporting practices. Using theories of political economy, we explain how defined benefit pension plans offer politicians a convenient way to satisfy public employee demands while providing the means to defer budgeted cash payments and obscure the accumulation of public debt from taxpayers.

More excerpts:

We argue the growth in unfunded public pension debt is occurring primarily because defined benefit pensions offer a satisfying solution to labor demands while providing politicians a flexible payment schedule with limited debt transparency to taxpayers. (page 89)

We further suggest that the aggressive political use of pension accounting is kept secret from the average taxpayer through complexity created and perpetuated by professional accounting and actuarial regulatory bodies. (page 90)

Having multiple expert parties involved and many complex moving parts in the pension calculation helps to diffuse responsibility for any errors in judgement and masks the inherent conflict of interest created by having paid auditors and actuaries working for government officials rather than the public. Regulation and professional codes of conduct are expected to mitigate this risk, but compliance is difficult to ascertain in such complex and long term transactions as defined benefit pensions. (page 93)

The resistance by actuaries to criticism of aggressive assumptions has been extraordinary, as evidenced by the recent censoring of a report by the American Academy of  Actuaries and the Society of Actuaries own task force (Burr, 2016). (pages 93-4)

Our analysis suggests that politicians are instrumental in their use of public pensions to satisfy the demands of labor while retaining the flexibility to choose when to actually fund them. Pressure from other interest groups for spending priority crowds out prudent funding and arcane accounting disclosure effectively hides this result from average voting taxpayers. It is only after required cash payments for pension benefits create a crisis by cutting into basic services that the public awakens to the consequences of the accumulating debt. This result is no better than a cash basis ‘pay-as-you-go’ accounting policy. The accounting profession has failed to provide the public with understandable information by promulgating flexible pens ion accounting disclosures that are so complex the average taxpayer is unable to understand their meaning. (page 100)

Simplicity should be the standard for public finance disclosure. Standard setters should stand by the citizenry from whom they derive their authority, and by professional ethical principles, in facing the issue of unfunded public debt, or quit making claims they operate in the public interest. (page 101)

8 responses to this post.

  1. Posted by skip3house on January 23, 2018 at 6:16 pm

    “….SIMPLICITY should be the standard for public finance disclosure. Standard setters should stand by the citizenry from whom they derive their authority, and by professional ethical principles, in facing the issue of unfunded public debt, or quit making claims they operate in the public interest…..”


  2. Posted by Tough Love on January 23, 2018 at 9:29 pm

    Pretty darn accurate ………….. too bad he didn’t mention to ROOT CAUSE of the pension mess …. the ludicrously excessive pensions promised Public Sector workers. Absent THAT, full funding wouldn’t be so difficult, and the pension mess would be either non-existent of a great deal smaller.


  3. Posted by Mike on January 24, 2018 at 6:51 am

    Had this article been published 10 years ago, maybe it would have been useful. Today the paper is just making points that everyone knows.

    There is a bit of self-oblivious parody in the paper. They call for simplicity and clarity of communication, and then include a couple of incomprehensible appendices.


  4. Posted by Anonymous on January 24, 2018 at 8:18 am

    With a DC plan, the employee and the employer must remit their agreed upon contribution rates to the individually owned investment account every pay period.

    While the employee’s pay-day contribution to his DB account provides a measure of full funding the employer is free to contribute less than its full share.


    • Posted by Tough Love on January 24, 2018 at 12:00 pm

      Let’s not leave out that the ……”employee’s …. measure of full funding” (i.e., the employee’s “contribution”) is TYPICALLY only 10% to 20% of the total cost of their promised pensions.

      And with NJ’s Public Sector “promised pensions” ROUTINELY 3 times (4+ times for Safety workers) greater in value upon retirement than those typically granted comparable Private Sector workers who retire that the SAME age, with the SAME wages, and the SAME years of service, paying SO little (for SO much) is anything but reasonable, just, or fair to NJ’s Taxpayers.


  5. Posted by T B on January 24, 2018 at 1:19 pm

    Move everyone to Social Security

    Here’s my solution:



  6. Posted by Richard on January 24, 2018 at 1:22 pm

    There is plenty to criticize about politicians and actuaries but lets not forget the pension fund managers. They are complicit in all this as well to the point of violating fiduciary responsibilities and committing fraud against plan members and the public at large.


  7. “If the profession cannot, or will not adequately respond, it is incumbent upon
    citizens to petition the U.S. Congress to have public pensions regulated by the
    Consumer Finance Protection Bureau.” (p. 101)
    Is this the next big question? should public pensions be regulated by CFPB, or might they be “persuaded” to conform to ERISA like standards by hanging tax deferred status as the carrot? (PERISA)
    “Sovereign Immunity for Public Employers” Girard Miller April 5,2012

    There is a national interest in how states and localities run their benefits plans. Anti-discrimination employment laws would be one example of individual rights trumping states’ rights if reasonably enacted. And federal law already requires that those public units outside of Social Security are required to maintain equivalent retirement systems for their employees.

    Girard Miller seems to advocate state sovereignty “However, the Congress would best leave the solutions to these problems to the states, even though I know this federalist path results in piecemeal changes that will take a half-decade to achieve.”

    but, he also apparently believed GASB would come to the rescue: “I think the Governmental Accounting Standards Board will soon push those numbers up onto the financial statements, and the ratings agencies along with the national bond lawyers and the Municipal Securities Rulemaking Board are clearly capable of establishing “overlapping debt” metrics that unveil the hidden future costs of these underwater pension and OPEB plans. So I see nothing there that Congress will ever do better.”

    That was in 2012. Today? Who knows?

    “If the profession cannot, or will not adequately respond…”


    I am from the FEDERAL government, and I’m here to help.



Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: