New Measure of Economy Will Include Focus on Government Pensions

As part of a new push to broaden the way economic growth is measured, government statisticians will soon begin using a new accounting method that’s likely to spotlight the problem of underfunded pension funds, particularly those managed by state and local governments across the nation.

Sometime in July, the Bureau of Economic Analysis will revise the way it measures the nation’s gross domestic product for only the 14th time. The GDP is the sum of all goods and services produced in the U.S. economy, and the coming changes will measure differently not just pensions but everything from R&D to music.

The Bureau of Economic Analysis will start counting spending on research and development as fixed investment that counts toward final spending taking place in the economy. It’ll also count as fixed investment expenditures by business on entertainment, literature and other forms of original art.

Importantly, the agency will adopt a form of accounting that’ll measure pension plans using the present-day value of future benefits promised by an employer. This change, called accrual-based accounting, likely will spotlight the unfunded promises in government pension plans.

“I think the measures we (had) developed were based on old concepts and old accounting standards that just sort of measured the cash flow,” said Brent Moulton, the Bureau of Economic Analysis’s associate director of national economic accounts. “It’s now been recognized both by economists and accountants … that you need to take the present value of those future obligations.”

The accounting shift won’t change the overall GDP numbers. But it should help spotlight, through reported data that breaks down to the regional level, how state and local governments have made promises without setting aside adequate funds.

Many private companies already provide present-value data on pensions to federal regulators, but state and local governments have not. During the 1980s and 1990s, strong stock market returns helped give the appearance that pensions were a source of income rather than a cost to sponsors of pensions, whether private-sector or government pension plans. Since 2000, two recessions and a deep financial crisis have hit investment plans hard, which is why accrual accounting is now being touted as a truer measure of employer costs.

“Hopefully, the data that we provide can help provide a benchmark or a set of accounts that people can reference when they’re discussing individual states,” Moulton said.

The nonpartisan Congressional Budget Office in May 2011 found that underfunding of public pensions was rampant.

“By any measure, nearly all state and local pension plans are underfunded, which means that the value of the plans’ assets is less than their accrued (promises) … for current workers and retirees,” the CBO said.

The Bureau of Economic Analysis’s new ways of measuring pension liabilities and other economic activity won’t result in a huge change in the headline number for economic growth in any given quarter – say, 5 percent instead of 2.5 percent. But the changes, said Steve Landefeld, the bureau’s director, will shed light on “the contribution of innovative activities to growth; hopefully, we’ll be getting a better handle on marquee issues.”

The changes were agreed to as part of an international agreement to modernize how GDP is measured across the globe. Australia and Canada already have adopted the new measurements. The European Union is scheduled to do so next year.