OK, this is quite amazing: Dean Baker catches the WaPo editorial page claiming that we have $3.8 trillion in unfunded state and local pension liabilities. Say it in your best Dr. Evil voice: THREE POINT EIGHT TRILLION DOLLARS. Except the study the WaPo cites very carefully says that it’s $3.8 trillion in total liabilities, not unfunded; unfunded liabilities are only $1 trillion.

I’ll be curious to see how the paper’s correction policy works here.

But how big is that $1 trillion anyway? It still sounds like a big number, doesn’t it? Dean tries to compare it with projected GDP, which is one way to scale it. Here’s another.

You see, the Boston College study doesn’t just estimate assets and liabilities; it also estimates the Annual Required Contribution, defined as

normal cost – the present value of the benefits accrued in a given year – plus a payment to amortize the unfunded liability

And it compares the ARC with actual contributions.

According to the survey, the ARC is currently about 15 percent of payroll; in reality, state and local governments are making only about 80 percent of the required contributions, so there’s a shortfall of 3 percent of payroll. Total state and local payroll, in turn, is about $70 billion per month, or $850 billion per year. So, nationwide, governments are underfunding their pensions by around 3 percent of $850 billion, or around $25 billion a year.

A $25 billion shortfall in a $16 trillion economy. We’re doomed!

OK, there are some questions about the accounting, mainly coming down to whether pension funds are assuming too high a rate of return on their investments. But even if the shortfall is several times as big as the initial estimate, which seems unlikely, this is just not a major national issue.

So, why is it being hyped? Do I even need to ask?