Atlas Shrugged: The Mocking

Tuesday, May 25, 2010

Those Problem Pension Funds

Let's look at Megan McArdle's post on public pension funds, a natural enemy for our econoblogger since she dislikes seeing other people paid for their labor. It's no coincidence that Rand Paul and McArdle both are libertarians. Only one of their confused yet merry band could talk themselves into supporting segregation and organ harvesting. Conservatives are usually content to despise minorities and others who reject the authority of the white male. Libertarians must elevate their distaste to an ideology, intellectualizing their emotional reactions to absolve themselves of responsibility for their fears and pettiness.

The New York Times has a practically libertarian-sounding article on public pensions, and the strain they are putting on the state and local governments.

The article describes out-of-control costs and corruption in public pension funds. Since McArdle is libertarian, she no doubt applauds the lack of regulation that created this situation, and knows that market equilibrium means people will stop asking for pensions, which are grossly underfunded in many cases. A new pension fund will spring up like a phoenix from the ashes, to take all the disgruntled former pensioners.

Public employees rack up overtime in their last year of work, with the active encouragement of their supervisors and even local politicians, then they retire with inflated pensions that can be greater than their base salary.

Your free market in action!

New York is the understandable focus, but these problems are hardly unique to my home state.

I love New York City, but it does seem to have a bit of a corruption problem. Where are the free marketers when New York needs them? Why don't New Yorkers leave for other cities, teaching New York that if it delivers poor value, other New Yorks will spring up in New York's place, taking all of New York's business?

In fact, New York is among the better states on funding of pensions, because they actually have to do some. Other states kinda sorta haven't really bothered -- at least not at anywhere near the levels that would be needed. New York's problem is notable only because its public sector unions are unusually powerful.

Say, didn't her dad lobby against unions? And we can see why she calls herself a better writer than 90% of her fellow countrymen. That paragraph just sparkles with elegant writing and bowls us over with its fact-based analysis.

The problem is that these things are nearly impossible to change. People have worked for twenty years or more under the expectation of pensions that were calculated this way; you can't just wait until they're 58 and say "Ha, ha, just foolin'." Worse, there's no actual procedure for doing what a private company does, which is to declare bankruptcy and have a court renegotiate the obligations with other creditors. Especially when the funds are run at the state level, we seem to be stuck with them.

You mean that public workers accepted benefits in lieu of the higher pay one can get in the private sector and now they expect to actually get those benefits? My god, the nerve!

One thing the New York Times article mentions, but doesn't highlight, is that these problems exist in part because the funds badly miscalculated the investment returns they could expect. It's commonplace to hear conservatives complaining that politicians just handed out these goodies to political supporters because terrible government accounting made it seem "free," and they'd be out of office when the bill came due. This is true, but it misses a couple of things:

Politicians in many cases really believed that these promises were free; they didn't understand the accounting problems.
These pension funds weren't the only ones using unduly rosy projections, though they may have been among the worst offenders. Private funds have had similar problems as equities underperformed this decade.

In other words, the bankers lied about the return the funds would get. Just like they lied about everything else. It's strange that McArdle doesn't emphasize this important fact.

Financial crises often seem to get tangled up in pension problems -- it's where the gap between fixed obligation, and income, becomes most glaring. These problems have been building for a while, but we may not be able to finesse them any longer.

But I hear that the rich are richer than they've ever been before, so at least the important people are happy. The newly poor will have to be content with being even poorer, since all their problems are the result of being fat and lazy.


Malaclypse said...

In other words, the bankers lied about the return the funds would get.

Gah, I hate to defend McMegan on even a trivia issue, but she actually has a point. Governments use accounting standards developed by the Governmental Accounting Standards Bureau (GASB), while everybody else uses rules governed by the Financial Accounting Standards Bureau (FASB).

The short, oversimplified version of what that means is that if you incur an expense but don't pay it this year, then that expense never happened at all, if you are a government. That is why gov't can "balance" a budget by delaying a paycheck date by a day or so.

GASB rules really are foolish, and really do encourage cheating.

Now, under FASB, yes, accountants do make bad assumptions about rates of return - GM was a great example of a company that systematically underestimated real pension costs, and overestimated returns. But at least GM had a liability on the Balance Sheet.

Under GASB, until and unless you actually pay the pension, you can pretend the expense did not happen. The rules of GASB really do encourage systematic pension abuses.

Note that some people (like McMegan, if memory serves) will go from this abuse of the rules to make statements about the TRILLIONS OF UNFUNDED LIABILITIES in the Social Security system. Unless they can talk about discounted future cash flows (which they won't, as it undermines their case), they are making technically true but deeply deceptive statements.

Sorry for being an accounting geek.

Susan of Texas said...

Don't be sorry, I know practically nothing about this stuff. I do know there are many legitimate problems with the way pensions are run, but I ignored them for the one relevant most to McArdle--the banks' malfeasance.

(I read Mish Shedlock's posts on pensions and I dislike his conclusions and analysis but at least he bases his work on facts, and didn't spend years cheering on the banks.)

Downpuppy said...

GASB has changed - Statements 25-27 required pension accruals in 1997

& GASB 45 required calculation of other unfunded retirement liabilities in 2006

Cyprianus said...

Check out comment 20 @

Anonymous P Hancock said...

Shorter Meggers: Contracts I don't like should be rendered void. Such is Libertarian ideological consitancy.

Anonymous P Hancock said...


Susan of Texas said...

Ha. That comment is just what I was thinking when I read the article.

Libertarians are consistent in one respect-what they want is good, what everyone else wants is bad.