June 9, 2012 · 0 Comments
By Dean Baker:
In the 90s, and in the years of the last decade before the housing crash, most economists and pension managers who made projections of stock market returns were making absurdly optimistic assumptions. Because price to earnings ratios in the stock market were well above their historic average it would be impossible for it to give its historic rate of return. This was simple arithmetic, which some of us tried to point out at the time.
Now that the market has plunged, it will be possible for it to produce its historic returns. This basic fact should have been mentioned in this NYT piece on public pension. This means, for example, that when the article tells us that San Diego:
“would require future hires to enroll in a defined-contribution plan, similar to a401(k) plan. In the future, public employees will be responsible for investing their own retirement money, and if their investments fail, the city’s taxpayers will not have to step in.”
San Diego has probably not saved its taxpayers a penny. It simply means that its workers will have less secure retirements for two reasons. First, workers will face the risk that the market will be down in the year that they retire, a concern that is irrelevant to city governments that in principle live indefinitely. Second, the administrative costs of 401(k)s are typically much higher than for defined benefit pensions. That means more of the workers’ money will go to the financial industry and less to their retirement.
Since workers value a secure retirement, the switch from a traditional pension to a 401(k) will mean that San Diego’s government now will attract less qualified workers, since it has effectively cut their pay, even though it has not saved its taxpayers any money. The NYT should have included the views of an economist who could have explained this simple point to readers.