Study Finds Further Reform of GASB Rules Necessary, But Must Be Measured
A new Pioneer Institute white paper finds that further accounting rule and pension-investment regulation reforms are necessary to put public pension systems on a firmer footing and foster a gradual adjustment to new economic realities.
“The discount rate used to value pension liabilities has long been at the crux of the debate over the cost and risks associated with public retirement systems,” said Iliya Atanasov, senior fellow on finance at Pioneer. “While the new GASB methodologies certainly aren’t perfect, they are mostly a step in the right direction.”
Atanasov’s paper The Logic of Pension Valuation: A Response to Robert Novy-Marx debunks a recently published article by Robert Novy-Marx, a longtime pension-reform advocate and professor of finance at the University of Rochester. Novy-Marx has been advocating the untenable position that newly revised Governmental Accounting Standards Board (GASB) rules for valuing mounting public retirement liabilities be replaced by what some academic economists call a “fair-value” or “risk-adjusted” rate of return.
Atanasov calls sparring over the “fair value” method “purely academic” and argues that it is an unnecessary distraction from the dire condition many defined benefit plans are in. He argues that the proper response to rising retirement costs is not one that threatens to tear apart the social fabric or makes it nearly impossible for governments to set budgets. Instead, fixes are needed to the overly generous promises to retirees, chronic underfunding and poor investment decisions that have left many defined-benefit plans in dire condition.
Public pension funds manage trillions of dollars of assets and carry trillions more in liabilities that have far-reaching implications for public employees, government budgets, taxpayers and, ultimately, the entire economy.
Atanasov writes that reforms should include moving away from allowing employees to retire well before the traditional retirement age; even stronger disclosure rules for all types of retirement benefits, not just public pensions; as well as rigorous controls on contribution rates, pension funds’ costs and asset-allocation strategies.
About the Author:
Iliya Atanasov is Pioneer’s Senior Fellow on Finance, leading the research tracks on pension management, data analysis and municipal performance. He is a PhD candidate in Political Science and Government and MA candidate in Statistics as well as a former Presidential Fellow at Rice University. He also holds BAs in Business Administration, Economics and Political Science/International Relations from the American University in Bulgaria.
Pioneer Institute is an independent, non-partisan, privately funded research organization that seeks to improve the quality of life in Massachusetts through civic discourse and intellectually rigorous, data-driven public policy solutions based on free market principles, individual liberty and responsibility, and the ideal of effective, limited and accountable government.
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