Debate about public pension plans should include understated funding levels

MIT Sloan Sr. Lecturer John Minahan

As a former pension consultant-turned MIT Sloan professor, I get asked to speak at my fair share of pension conferences. I recently spoke at a symposium for trustees of Taft-Hartley funds, which are pension funds for unionized workers jointly trusteed by union representatives and management. After my talk, something unexpected happened: the audience gave me a hearty round of applause. This was unusual because often when I speak at these events, it seems people want to throw things at me.

Allow me to explain. I worked for over a decade in the pensions industry, and during that time and since, I’ve observed intense politicization around whether public (state and local) pension plans are adequately funded, and especially whether the actuarial rules for determining how much funding is necessary are up to the task. On one side are plan sponsors and actuaries who say that, based on traditional actuarial methods, the funds are in decent shape; and on the other side are economists (and a few actuaries) who contend that traditional actuarial methods understate and obfuscate the pension commitments state and local governments have made, and that the plans are in far worse shape than is generally acknowledged.

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