This is the Cato Daily Podcast for Wednesday, October 30th, 2013.

I'm Caleb Brown.

The public pension crisis is a difficult one to understand.

It's a crisis years in the making, and sophisticated mathematics obscure many of the troubling realities about these large open-ended pension funds.

Rick Dreyfus is a senior fellow at the Commonwealth Foundation and at the Manhattan Institute.

We discussed state pensions and an event on the subject held October 1st.

The issue that is perhaps most important in evaluating state pensions in terms of aligning the incentives of all the public sector

actors with their actions and making sure that they're taking care of public sector retirees

properly. The biggest issue to me seems to be how you

discount those liabilities, is that fair to say?

That's the biggest driver of the cost and the liabilities and that ultimately determines how much money you have to put in the plan in a given year.

So that's correct.

So you're an actuary, but as I asked you just before we started recording, I said you're not one of these actuaries who thinks that 8% is appropriate on these essentially riskless liabilities. Is that that's right? Right. I think 8% is a bit too

optimistic. In fact the state of Rhode Island just brought an actuary in to look at

there 7.5% assumption, and their assessment was

they had about a 40% likelihood of achieving 7.5% over the next 20 years. So the question is do you want to

anchor your entire pension system around something that has about a 40%

likelihood of attainment and I think that's the risk.

Just to back up a little bit for people who are not real clear on this issue

when it comes to state pensions it's a little complicated.

The government sets a rate that they expect to earn on a portfolio and then that is the rate at which they then discount their liabilities.

The higher the rate, the less the government has to contribute to the pension plan and

...