Yes, the Government is Long-Lived

In the debate over how to value public sector pension liabilities an argument that seems to impress some people is this. Public sector pensions can guarantee their pensions with risky assets because the government never goes out of business. Andrew Biggs has written several responses to this notion. The latest piece to make this claim appeared in The Weekly Standard. Andrew and I offer a refutation.

The recurring theme that the government can value pension liabilities as though they were risky because it is long-lived is an oxymoron.  It is precisely because the government is unlikely to go out of business that public sector pensions are considered guaranteed. That is why economists suggest using a risk-free discount rate to value public pension obligations. It’s because of the government guarantee – the government is more likely, not less likely, to pay it. Current public pension accounting implies otherwise. The subtext in defense of this flawed accounting is, “If all else fails, raise taxes.”

“The risk is borne by the taxpayer” is the missing subtitle to the headline, “The government is long-lived.”

Veronique deRugy offers a fantastic analysis of this debate here. Followed by Yuval Levin here.