Policy Documents

The Origins and Severity of the Public Pension Crisis

Dean Baker –
February 1, 2011

In recent months, there has been a considerable effort by many political actors to promote fears over the size of public pension shortfalls. While many, if not most, public pensions do face shortfalls, much of the discussion has been misleading about both the origins of the shortfall and its severity. This paper tries to put these issues in  a clearer perspective. The first part examines the origins of the shortfall by noting the extent to which pensions have lost value due to the recent economic crisis. The second section discusses the appropriate rate of return to assume on pension fund assets. The third section puts projected pension fund shortfalls in perspective by projecting their size relative to future state income. This is followed by a brief conclusion.