Steven Malanga | Bad Pension Math Is Bad News for Taxpayers

Much of the blame for the government pension crisis in America has been aimed at overly optimistic projections of investment returns, which have allowed politicians to promise government workers attractive benefits at what seems like a low cost to taxpayers. When pension funds have missed these investment marks, as they did spectacularly in 2008, pension debt has soared and taxpayers have been stuck making up the difference.

Now a new study by Moody’s finds that state and local retirement debt has grown sharply even during periods when pension funds have largely hit their investment goals, thanks to the questionable accounting techniques employed by many public funds. Given that few of the reforms passed by states recently have addressed the dubious booking-keeping that Moody’s criticizes in its report, taxpayers should worry that the pension crisis will only grow worse in coming years.

From 2004 through the end of 2012, unfunded liabilities in the biggest government pension funds nearly tripled to just under $2 trillion, the disheartening new report notes. During this period, the funds’ investment returns averaged 7.45 percent annually, just slightly below their projections. But by employing a host of questionable accounting techniques, the pension funds understated their debts and minimized the amount of money that governments and workers needed to contribute to these systems, shorting them of valuable assets.

One example of the problematic accounting is known as smoothing, in which funds calculate their assets by averaging them over an extended period of time to hide the impact of sudden drops in the marketplace. In times of distress, pension systems have sometimes extended their window for smoothing assets further and further into the past.


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