Dean Baker

And now for something completely different.

Treasurer Gina Raimondo’s hair-raising warnings about Rhode Island’s $5 billion (or is it $10 billion?) unfunded pension liability have garnered a lot of press in recent days following her high-profile appearances on PBS and WPRI 12′s “Newsmakers.”

But there’s another way to look at the problem that makes it seem a whole lot less frightening, at least when you take the long view. That view comes courtesy Dean Baker, the liberal economist who famously warned about the housing bubble starting in 2002.

Baker has released a new study on state pension systems, and here’s his conclusion:

The shortfalls facing most state and local pension funds have been seriously misrepresented in public debates. The major cause of these shortfalls has not been inadequate contributions by state governments, but rather the plunge in the stock market following the collapse of the housing bubble. Given the low [price-earnings] ratios in the stock market, pension fund assumptions on the future rate of return on their assets are consistent with most projections of economic growth and past experience. Furthermore, when expressed relative to the size of their economies, most states are facing shortfalls that appear easily manageable.

Rhode Island’s unfunded pension liability was $4.9 billion as of June 30, 2007, which Baker calculates as being equal to 0.35% of future state income. Put another way, Rhode Island could close the shortfall if it devotes 35 cents out of every $100 of its future economic output toward addressing the problem.

Now, for those who prefer their pension news glass-half-full, Baker does find that Rhode Island’s liability is tied for third-biggest as a share of future output – only Ohio’s (0.47%) and Illinois’ (0.37%) are larger. But, he writes, “Even in the states with [the] largest shortfalls, the burden appears manageable.” (Then again, tell that to the politician who has to find the extra 35 cents in revenue.)

Of course, if there’s any truth to Raimondo’s suggestion that the unfunded liability is actually as high as $10 billion, that would roughly double the share of future output needed to cover the pension shortfall. And Baker’s study doesn’t include locally-managed municipal pension plans or retiree health care, which is almost entirely unfunded at the state and local levels. And his forecast, like everyone else’s, contain a lot of educated guesses about the future.

Still, Baker’s study offers an interesting – and rare – alternative view of the pension problem. It also makes quite a contrast with Northwestern Professor Joshua Rauh, who thinks Rhode Island’s pension fund is in such bad shape it will run out of money completely in 2023 – only 12 years from now.

On a side note, Baker and I also exchanged e-mails last week about his use of a 2007 valuation for Rhode Island’s pension liability – most other states had a more up-to-date figure from 2008, 2009 or even 2010. Baker said he was surprised Rhode Island’s was so old. But the $4.9 billion figure for 2007 is actually pretty close to the most recent one we have, $4.8 billion in 2009, so it doesn’t really change his argument.

(photo: Center for Economic and Policy Research)