Analysts Offer Differing Views on Needed Pension Changes

An article by MarylandReporter.com, discusses the views of some economists and researchers to address the pension shortfalls of many states.   Some are calling for changes in accounting principles used and others are calling for changes in investment strategies.

Andrew Biggs, an economist with the American Enterprise Institute for Public Policy Research, said that state pension plans are doing worse than the states will admit. Biggs testified about what he called the flawed way states calculate pension obligations before the House of Representatives’ Oversight Committee.  Biggs said that because state governments use different accounting standards to calculate their pension obligations, they end up hiding the seriousness of the underfunding problem. A long-range 8% rate of return is calculated for many state pension systems, instead of calculating based on current interest rates. (Maryland uses 7.75%.)

Others disagree with this assessment.

Keith Brainard, research director for the National Association of State Retirement Administrators, countered that Biggs’ assessment is completely incorrect. He said that the way that pension liabilities are calculated is the most realistic way to look at the anticipated returns, and that those figures tend to be accurate when looking at the system over long periods of time.  The Governmental Accounting Standards Board (GASB) sets the rules for calculating pension liabilities. Brainard said that the way states calculate their liabilities tends to be accurate, even though the method is not used by the private sector.

With respect to Maryland, contribution and benefit changes were made to the pension system, but some believe these actions didn’t go far enough.

Jeffrey Hooke, chairman of the Maryland Tax Education Foundation – a nonprofit focused on explaining the government’s financial decisions – characterized these changes as “nibbling around the edges” of the problem. Last month, Hooke presented the General Assembly with yet another way that the state could save money on its pension system: indexing its assets instead of paying money managers, especially because returns on investments for the last 10 years have been poor.

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