Regular readers of this website know that public pension liabilities become much larger when they are discounted at the proper risk-free rate of return rather than the expected rate of return. But using the proper discount rate isn't just a budgetary issue--it also implies that the cost of pension benefits provided to government workers is several times greater than the cost of retirement benefits in the private sector.
Failure to make the crucial discount rate adjustment is one reason why some past comparisons have concluded--erroneously--that even public workers in heavily unionized states are somehow not compensated any better than their private-sector counterparts.
Andrew and I wrote a detailed treatment of this issue for the ABA Journal of Labor and Employment Law, and the paper is now available online for anyone who is interested.
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