TAILIEUCHUNG - The Origins and Severity of the  Public Pension Crisis 

It appears that the 1998 totals are somewhat lower due to the benign credit cycle in the . for the past five years (1993-1997), when default rates on public high yield bonds averaged less than 2% each year (Exhibit 2, Altman & Kishore, 1998). The supply of public, domestic defaulted bonds was about $10 billion as of mid-1998 and our best estimate of distressed public debt is about $13 billion. At the same time, we have noticed an increase in distressed securities in 1998. The resulting total of defaulted and distressed, public bonds and private debt as of end of August 1998 is. | cepr CENTER FOR ECONOMIC AND POLICY RESEARCH The Origins and Severity of the Public Pension Crisis Dean Baker February 2011 Center for Economic and Policy Research 1611 Connecticut Avenue NW Suite 400 Washington . 20009 202-293-5380 CEPR The Origins and Severity of the Public Pension Crisis i Contents Executive The Impact of the Economic Crisis on Pension Fund Projecting Future Pension The Size of the Public Pension Shortfall in About the Author Dean Baker is an economist and Co-Director of the Center for Economic and Policy Research in Washington . Acknowledgments Alan Barber Hye Jin Rho Kris Warner and Nicole Woo gave helpful comments on earlier drafts of this paper. CEPR The Origins and Severity of the Public Pension Crisis 1 Executive Summary There has been considerable attention given in recent months to the shortfalls faced by state and local pension funds. Using the current methodology of assessing pension obligations the shortfalls sum to nearly 1 trillion. Some analysts have argued that by using what they consider to be a more accurate methodology the shortfalls could be more than three times this size. Based on these projections many political figures have argued the need to drastically reduce the generosity of public sector pensions and possibly to default on pension obligations already incurred. This paper shows Most of the pension shortfall using the current methodology is attributable to the plunge in the stock market in the years 2007-2009. If pension funds had earned returns just equal to the interest rate on 30-year Treasury bonds in the three years since 2007 their assets would be more than 850 billion greater than they are today. This is by far the major cause of pension funding shortfalls. While there are certainly cases of pensions that had been underfunded even before the market plunge prior years of under-funding is not the main reason that .

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