New Book

I have a book coming out next month from Yale University Press. It's called Acting White: The Ironic Legacy of Desegregation. For more information about it, see my personal website here. The book is available on Amazon here. (I'm going to leave this post on top for a while, so scroll down for any new content.)

New Report on Teacher Pensions

Yesterday, the Manhattan Institute and the Foundation for Educational Choice released a report written by me and Josh Barro. The title: "Unfunded Teacher Pension Plans: It's Worse Than You Think." The main finding:

According to the fifty-nine funds’ own financial statements, total unfunded liabilities to teachers—i.e., the gap between existing plan assets and the present value of benefits accrued by plan participants—are $332 billion. But according to our more conservative calculations, these plans’ unfunded liabilities total about $933 billion.

In addition, we have found that only $116 billion, or less than one quarter, of this $600 billion discrepancy is attributable to the stock market drop precipitated by the 2007 financial crisis. The Dow Jones Industrial Average would have to nearly double overnight to make up for the present underfunding of these plans.

The meat of what we did is this: Most state plans assume that their current investments will get about an 8% rate of return in perpetuity. So that means that they set aside less money now to cover the pensions that will be paid in 2015, 2020, 2025, etc. But the 8% assumption is wrong, we argue, for two reasons: First, recent history shows that it may be too optimistic. Second, investments that have an 8% expected rate of return necessarily carry some risk -- risk that the plan will actually fall short in a given year or even decade. And when a plan falls short, the burden falls to the taxpayer to make up the difference.

So we reanalyzed the teacher pension plans using the same interest rate that private plans are allowed to use -- about 6%, based on corporate bond rates. When we do that, it turns out that pension plans are way more underfunded than they are publicly admitting.

Over at The Quick and Ed, Chad Aldeman has a response to our study:

States, unlike private companies, do not fold under. Indiana, which according to the authors has a DB pension plan for teachers that is only 42% funded, is not likely to go out of business and take its workers down with it. The state of Indiana can assume a riskier investment return for its pension fund than an employer like those mentioned above or any other modern private firm (and, just for good measure, it’s worth pointing out that Indiana assumes only a 3 percent real rate of return).

All this is lost on the report’s authors, who would prefer states lower their assumptions on stock market returns from about 8 percent down to 6, the standard rate used by corporations in their calculations. This would mean telling a state like Pennsylvania, which has accumulated a 9.23 percent return in the stock market over the last 25 years (as of February 2010), that its 8 percent investment assumption is too high.

This is all irrelevant. We're not saying that when states engage in risky investments, teachers then are at risk of not being paid their pensions. The problem is precisely the opposite: Teacher pensions are guaranteed by states that don't go out of business. But that doesn't make the risk magically go away. The risk just ends up being borne by the taxpayer. So if a state decides to blow all of its pension money gambling at a horse race, the teachers will still get their pensions, but taxpayers will suddenly find themselves paying higher taxes to make up the shortfall (or else seeing huge budget cuts to other important state services).

In the last sentence, Aldeman cites a document put out by the Pennsylvania pension system, but that document actually proves our point. The Pennsylvania pension system may have made an average of 9.23% per year for the past 25 years, but you just have to read a bit further to see the prediction that looking forward, there will still have to be "significant and perhaps prohibitive tax increases at the State and/or Local levels."

Moreover, to focus on the 25-year rate of return, as Aldeman does, ignores three things: 1) Past performance is no guarantee of future success; 2) the PA pension system now has less assets on Dec. 31, 2009 than on June 30, 2004, which means it lost money over a 5.5 year period; and 3) this kind of variability (i.e., risk) requires taxpayers to pay extra when investments are disappointing for years on end.

The problem with Pennsylvania, as with many other states, is that when times were flush (the late 1990s or the mid-2000s), legislators did not have the foresight to let pension systems accumulate some savings for possible tough times ahead. Instead, they decided to lower contributions to pension systems and increase pension benefits, all on the assumption that high stock market returns would magically pay for it all. But when the stock market falls, the pension systems are left with extra liabilities that no one ever paid for, and the risk ultimately rests with the taxpayer.

It's a heads-I-win, tails-you-lose system. That's why taxpayers need state pension systems to use an accounting method that more properly and honestly accounts for all of the risk that they're shifting onto us.

10 Most Influential Books

Lots of bloggers are listing their 10 most influential books. Keeping in mind that influence is something that's difficult to quantify, here are 10 books or authors that affected my thinking in some way:

1. C.S. Lewis, Miracles. I find Lewis's refutation of philosophical naturalism convincing.

2. C.S. Lewis, The Great Divorce. A fantastical depiction of a resident of hell who takes a tour of heaven.

3. Sheldon Vanauken, A Severe Mercy. This book shaped my thinking on love and marriage as an impressionable young adolescent. It tells the tale of an American couple who fall in love and attempt to build the perfect marriage, who travel to Yale and Oxford together (befriending C.S. Lewis along the way), and who return to America only to find that the wife has a fatal disease and will soon perish. It's almost unbearably moving. (I have several letters that Vanauken wrote to me; we corresponded for a while before he died in 1996.)

4. Sheldon Vanauken, Under the Mercy. This book probably started me on the journey to becoming a Catholic. It's a sort of sequel to A Severe Mercy, telling what Vanauken did after his wife died.

5. The Collected Works of G.K. Chesterton. I couldn't pick a single work here, but I spent a good deal of time in college reading through most of the Chesterton books on a couple of shelves in the library. (Chesterton was quite prolific.)

6. Pascal's Pensees. This collection of observations and sayings makes the list even if limited to one line alone: "All human evil comes from a single cause, man's inability to sit still in a room." (I guess you have to read that in context for it to make sense . . . .)

7. Neil Postman, Amusing Ourselves to Death. I liked all of Postman's books, including those he wrote as a 1960s radical, but this one struck me as a perfect description of American pop culture. The cover of the old paperback -- with the headless people watching TV -- was perfect. (I say this as something of a hypocrite, of course; despite canceling cable 4 years ago, I'm still an avid watcher of Lost and 24 online.)

8. Aristotle, Nichomachean Ethics. I like the observation that virtue consists of forming the right habits by acting in the right way: "we become just by doing just acts, temperate by doing temperate acts, brave by doing brave acts." I'm reminded of the modern psychological evidence that how you act affects your emotions.

9. The novels and fairy tales of George MacDonald, the 19th century Scottish writer.

10. Jane Jacobs, The Death and Life of Great American Cities. Full of trenchant and wise observations about what makes for a successful polis. (Runners-up here: City Comforts, Till We Have Built Jerusalem: Architecture, Urbanism, and the Sacred, and The Geography of Nowhere.)