Atlas Shrugged: The Mocking

Friday, April 10, 2009

The Great Debate

Megan McArdle's last post is quite exciting because it is further evidence in the great McArdle debate: Is she ideologically blind, dishonest or stupid? So far the preponderance of evidence supports blindness, with a sprinkling of dishonesty and stupidity. Alas, this post supports the blindness theory. My personal favorite is the stupidity theory because it's funnier, but that theory was always weak. Someone who managed to graduate from two good universities chooses to be stupid, she isn't naturally stupid. The evidence:

America's public sector pensions have been a scandal for years. It wasn't that long ago that they finally got around to doing their accounting the way that normal pensions do: by showing how likely their assets were to generate enough revenue to pay for future benefits. When they did, we found out what critics had long been claiming: many pension funds for state and local governments were disastrously underfunded. Politicians had gotten into the habit of promising generous pensions as a "cheap" giveaway to powerful unions.

The pensions are underfunded due to "a "cheap" giveaway to powerful unions." Not the economy, drained and tossed aside by the wealthy. The unions. Her proof? Private pension funds are not nearly as underfunded as public pension funds.

[Pension underfunding] is not, it should be emphasized, exclusively a problem of public sector pensions; private firms are also underfunded. But the scale is vastly different.

This is where McArdle's ideological Underoos starts to show. Private good, public bad. Period. Thinking ends at that point. If McArdle had continued to study the issue, she might have noticed a problem.

According to the Pension Benefit Guaranty Corporation, which regulates and insures pensions, the total deficit in private plans covering about 34 million workers was a little over 10 billion as of September 2008. That's almost certainly multiplied quite a bit since then. But the current underfunding in public plans, which cover about 22 million workers, seems to be something north of a trillion dollars. And they're not insured.

Really? Ten measly billion shortfall for 34 million workers versus a trillion for 22 millions workers? That's a pretty big discrepancy and should make McArdle look twice. It didn't, and the PBGC sent her an e-mail correcting her error.

Actually, the PBGC was reporting on the shortfall in its own insurance
program. The private sector pension plans insured by the PBGC are in
reality underfunded by hundreds of billions of dollars. A recent
Milliman study for instance shows the shortfall among the largest 100
corporate pension plans to be $217 billion. Calculated on a
termination basis (that is assuming the pension plans were ending today)
the underfunding number is much higher.

So while the two systems (public and private pensions) are vastly
dissimilar (one with taxpayers as guarantors of last resort, the other
with the PBGC backstop), neither currently has assets sufficient to keep
its benefit promises.

I love that "actually." It's polite and gently corrects her error. I would have been a bit more pointed. McArdle's response is a classic of its kind.

The problem in the public funds is still bigger, but not as much bigger as I'd initially thought--which makes sense, since a bunch of funds, like the airlines, have been chronically underfunded since the 2000 stock market crash. It's hard for any entity to keep promises made forty years in the future.

She admits her facts were wrong but does not reconsider her opinion regarding private versus public pension funding. Why? Those damn unions that killed the golden goose. Of course an even cursory glance through the news proves this is wrong as well.

Financial Times: The crises facing pension plans for US state and municipal employees is deepening as investment losses deplete the resources of retirement funds for teachers, police officers, firefighters and other local government workers.

Bloomberg: The misleading numbers posted by retirement fund administrators help mask this reality: Public pensions in the U.S. had total liabilities of $2.9 trillion as of Dec. 16, according to the Center for Retirement Research at Boston College. Their total assets are about 30 percent less than that, at $2 trillion.

With stock market losses this year, public pensions in the U.S. are now underfunded by more than $1 trillion.

California After years of gambling in real estate investments, the state workers pension fund has lost more than 41 percent of its value, after peaking last fall. Its real estate holdings have dropped from $9 billion to $5.8 billion, according to the Sacramento Bee.

New York: “Obviously, the collapse in the financial markets has a had a significant impact on our holdings,” Thomas P. DiNapoli, the state comptroller, said in a statement.

North Carolina: A year ago, the fund was worth $77 billion. The drop represents a 19.7 percent decline in fund performance, a measure created by the fund's actuary.

Cowell said the fund is down because of the dramatic downturn in global markets. The state's treasurers have traditionally been conservative in how they invest the money, which is why the state's pension fund is faring better than other similar funds, she said.

Pennsylvania: From July 1 through Sept. 30, the two funds fell by more than $12 billion, or nearly half the size of the current state budget.

The State Employees’ Retirement System said its investments fell about 14.4 percent from January through September, while the larger Public School Employees’ Retirement System’s investments dropped 16.7 percent for the one-year period ending Sept. 30.

The government workers’ pension fund shed $4.3 billion dollars from July 1 though Sept. 30, ending the period with a value of $29.3 billion. The teacher fund, the nation’s 14th largest public defined-benefit pension fund, lost $8 billion over the same three-month period to a value of $54.7 billion.

The stock market has experienced steep declines in October and November, and the two pension funds warned that their year-end accounting may end up looking worse.

In a statement, the state employees’ pension fund said its investment performance in 2008 closely mirrored that of other large public pension funds in a prominent national comparison service.

Stupid or dishonest, ideological or stubborn, it doesn't matter in the end. Living a lie is its own revenge, for the damage it does to the soul.

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