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Kicking the Can: Concealing Budget Shortfalls by Underfunding Pensions

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Pension funds are using unrealistic assumptions about their future pension returns, concealing shortfalls that will eventually have to be paid for with benefit cuts or higher taxes. Politicians are promising generous pensions without adequately funding them, requiring risky investments. When investment returns don’t materialize, taxpayers have to cover the shortfall.

Be sure to read “Hidden Debt, Hidden Deficits: 2017 Edition,”  in which Joshua D. Rauh details the issues surrounding the pension system and the role of governments in increasing liabilities and deficits by means of their pension system. 

Discussion Questions

  1. What rate of return should state politicians and pension fund officials assume that their funds will yield?
  2. Why might an actuary assume unrealistic high returns on investments?
  3. What would cause states to ignore the possibility of lower investment returns in the future?