Joshua Rauh believes public pension sponsors have been violating the basic laws of financial economics by making overly rosy assumptions about future liabilities. For sounding the alarm over an impending disaster in the public defined benefit system, the Stanford University finance professor has become a darling of political conservatives who want to see such pension plans dismantled. Unlike some on the right, though, Rauh, 39, doesnt think retirement income security lies with 401(k)-type plans. Im in the camp of trying to figure out what would be the right model going forward, explains the Massachusetts native. While earning a Ph.D. in economics from the Massachusetts Institute of Technology, Rauh focused on corporate pensions. Published in the Journal of Finance in 2006, his doctoral dissertation examined how employer contributions to a pension fund crowd out other investments a corporation might make. By then the corporate world was freezing defined benefit plans, so Rauh turned his attention to public plans to determine if those pensions were, in similar fashion, keeping new roads from being built. He discovered that they were massively underfunded. Rauh wants to see new private and public pensions that offer pooled, professionally managed investment vehicles and stop providing unfunded guarantees. It would have to come from brave state and local leadership, he says. To help educate the public, Rauh recently put his Stanford graduate finance course on retirement planning and pensions online for free.
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