Tuesday, March 28, 2017

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Illinois conjures Squeezy the Pension Python

Illinois Office of the Governor has released a video aimed at school kids. It’s subject: the importance of paying workers their government pensions. It’s meant to get Illinoisans excited about pension reform. Illinois has the worst pension system in the country. The pension liability grew by $12 billion this year. According to Illinois official accounting the unfunded liability is $100 billion. Under market valuation the unfunded liability is over $200 billion. The Civic Federation calls the system, “Unfixable.”

Enter, Squeezy the Pension Python.

Cute.

There’s some history about the Romans, the American Revolution, and World War I. There’s a basic message about why we (i.e. government on your behalf)  should make sure promises are kept. But, not surprisingly, this video totally misdiagnoses why the pension fund is running on empty. I didn’t expect it to contain much in the way of discount rates. Instead the blame is shifted to yesterday’s politicians and the 2008 Wall Street crash (and the fact that people live longer). There is barely a mention of why the economic assumptions that drive the valuation and accounting really matter. Sure, it’s not easy to explain arbitrage, present value, discounting, or the time value of money to second graders. So, instead the video makes the case for how the buck has been passed time and time again, for the children.

Reactions to the video have been decidedly mixed.