Anyone working in the pension reform movement is soon confronted with arguments from defenders of the current pension system that are--to put it nicely--inconsistent with standard financial economics. I call these "public pension fallacies," and I address a long list of them in a recent paper for the Heritage Foundation.
There is, of course, a spirited and entirely legitimate debate about the best ways to pursue pension reform. But defenders of the current system argue that major reform is not needed at all, because pension benefits are somehow not nearly as generous or costly as they actually are.
Public pension fallacies are simply wrong as a matter of fact, logic, or economic theory. But they are so often repeated--in press releases, talking points, letters to the editor, debates on radio and television, think tank reports, and even actuarial statements--that many seem to have become conventional wisdom in some circles, even as finance economists roundly reject them.
The full list of fallacies is below. Please follow the link above to read concise explanations, written in laymen's terms, of why economists find these arguments so unpersuasive. I'm hoping the paper will be a particularly useful reference for journalists who are studying the pension reform issue.
Fallacy 1: The average pension
payment is a good indicator of the generosity of the plan's benefits.
Fallacy 2: The cost of a public-pension plan is equal to whatever the government contributes to the pension fund each year.
Fallacy 3: Public-pension plans can "assume away" risk because governments are long-lived.
Fallacy 4: Advocates of risk-adjusted discounting are merely a niche group of contrarian economists.
Fallacy 5: Critics of public-pension accounting assumptions are projecting low rates of return.
Fallacy 6: The investment returns earned by a pension fund pay for most pension benefits, so taxpayers are actually charged very little.
Fallacy 7: Public pensions are not overly generous because they are simply deferred compensation.
Fallacy 8: Generous pensions are necessary because some government employees do not participate in Social Security.
Fallacy 9: Closing a public pension carries major transition costs.