Moody’s public pension scheme doesn’t make sense – unless you’re on Wall Street

May 21, 2013 | Economic Opportunity Institute

gordon gekkoWall Street bankers have been known to get creative – if not downright deceptive – when finding ways to maximize their own income. Now Moody’s, the bond-rating agency that overvalued junk investments and helped bring the country (and world) to their brink of financial ruin just five years ago has a new trick up its sleeve: making public pensions seem underfunded, thereby sucking essential resources from other government services.

The heavily criticized proposal would essentially pit public sector workers – depending on the pension they earned – against low-income people, school children, college students, drivers, and others who utilize state services (just about everyone!). Economist Dean Baker explains:

Instead of accepting projections of pension fund returns based on the assets they hold, Moody’s wants to use a risk-free discount rate to assess pension fund liabilities. This will make public pensions seem much worse funded than the current method.

Under the Moody’s plan, governments would need to pour massive amounts of money into funding these risk-free pensions, which would divert public funds away from essential public services. Not only is the plan bad politics, it just doesn’t make much sense according to Baker:

A state or local government that used the Moody’s methodology to guide their contributions would effectively be prefunding their pensions in the same way that it would be prefunding education to build up a huge bank account so that K-12 education was paid from the annual interest. While it would be nice to have the cost of these services fully covered for all time, no one thinks this policy makes sense. We would be hugely overtaxing current workers so that future generations could get a huge tax break.

Baker also argues the Moody’s plan could lead to decreased risk-taking among pension managers among larger pools, because while they wouldn’t be compensated extra for good years, they would be held accountable for bad ones. In contrast, individual investors would hold their stocks in more-risky 401(k)s as a result of the policy change, an outcome that “makes no sense.”

So why is Moody’s recommending this change? Again, Dean Baker:

This is exactly the sort of politics that the Wall Street and the One Percent types love. No matter which side loses, they win. While public sector workers fight the people dependent on state and local services, they get to walk off with all the money.

Underfunded public pensions have become a major talking point for some who want to drown government in the bathtub. But the Moody’s’ plan – cooked up by the same people who were asleep at the wheel during the financial crisis –  seems like the wrong strategy for preserving pensions and maintaining critical government services.

By EOI Intern Bill Dow

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Posted in Retirement Security

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