Josh Barro, Eileen Norcross, Joshua Rauh, Andrew Biggs and others have explored the problem of overly optimistic funding assumptions in public pension valuations.
Some guy with no background in public pensions named Bill Gates thinks it’s a problem, too. He’ll cover the topic in a TED talk today.
Gates previewed his comments for the Wall Street Journal:
“These budgets are way out of whack,” Mr. Gates said. “They’ve used accounting gimmicks and lot things that are truly extreme.”
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He said he is concerned that states’ public employee-benefit costs could now stand in the way of broader changes. These include programs Mr. Gates’s foundation backs that aspire to use technology (including cameras that monitor classrooms) and strengthened teacher evaluations to improve K-12 education.
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One focus of Mr. Gates is public pension funds’ use of a relatively high discount rate to calculate obligations. The discount rate is an assumed rate of return used to calculate the current value of a future liability.The higher the rate, the smaller a fund’s obligations appear?and the less that states need to contribute to their pension funds. Critics blame this accounting approach for contributing to state pension shortfalls, estimated nationwide to total more than $1 trillion.
