Reprinted from fair.org by Dean Baker
"Bankruptcy," declares a New York Times photo. (photo: Joshua Lott/Reuters)
Reputable newspapers try to avoid the self-serving studies that industry groups put out to try to gain public support for their favored policies. But apparently the New York Times (3/17/16) does not feel bound by such standards. It ran a major news story on a study by Citigroup that was designed to scare people about the state of public pensions and encourage them to trust more of their retirement savings to the financial industry.
Both the article and the study itself seem intended to scare more than inform. For example, the piece, by reporter Mary Williams Walsh, tells readers:
Twenty countries of the Organization for Economic Cooperation and Development have promised their retirees a total $78 trillion, much of it unfunded, according to the Citigroup report.
That is close to twice the $44 trillion total national debt of those 20 countries, and the pension obligations are "not on government balance sheets," Citigroup said.
OK, folks, how much is $78 trillion over the rest of the century for the 20 OECD countries mentioned? Is it bigger than a breadbox?
The Times has committed itself to putting numbers in context; where is the context here? Virtually none of the Times' readers have any clue how large a burden $78 trillion is for OECD countries over the rest of the century. The article did not inform readers with this comment; it tried to scare them. That is not journalism.
For those who are keeping score, GDP in these countries for the next 80 years will be around $2 quadrillion, or $2,000 trillion (very rough approximation, not a careful calculation). So we're talking about a big expense, roughly 4 percent of GDP, but hardly one that should be bankrupting.
Furthermore, the whole treatment of the expense as an "unfunded liability" is problematic. Suppose the United States spends 7 percent of its GDP on education (roughly current spending) and this share is projected to rise to 8 percent over coming decades. We can treat the commitment to educating our children as an "unfunded liability"; after all, we don't have any money set aside from prior years to fund it.
But since we are already spending 7 percent on education every year, the additional burden will just be the boost to 8 percent. That is a burden of 1 percentage point of GDP, or roughly half the cost of the increase in annual military spending associated with the wars in Iraq and Afghanistan.
There is a similar story with public pensions. In the case of Social Security, the US is currently spending about 5.0 percent of GDP on the program, up from 4.0 percent in 2000. Spending is projected to rise by another percentage point over the next 10--15 years; are you scared?
Almost every item mentioned in this article seems intended to scare, from the very first paragraph:
When Detroit went bankrupt in 2013, investors were shocked to learn that the city had promised pensions worth billions more than anyone knew -- creating a financial pileup that ultimately meant big, unexpected losses for Detroit's bondholders.
Investors were shocked, really? Are the people who invest trillions of dollars morons? The books of Detroit's pension system were publicly available. The problem was not the actuarial accounting blamed in this piece; the problem was simply that Detroit was a bankrupt city unable to meet its obligations because of a tax base that crashed as it lost two-thirds of its population.
If there were any investors who were shocked by Detroit's pension liabilities, then the Times should do a major piece profiling these people. They are almost certainly way over their heads in jobs that pay six- and seven-figure salaries.