If a public or corporate official distributes false financial information that serves as the basis for unwarranted action by others, they are guilty of either fraud or negligence depending on whether it was signed off on knowingly or carelessly. Why then are academics not held to the same level of accountability?
To cite one example, in an op-ed piece in the Dec. 10 Providence Journal, finance professor Joshua Rauh and assistant finance professor Robert Novy-Marx made the following statement:
“In Rhode Island, an anticipated annual return of 8.25% in pension investment has for the past decade come in at about one-third that rate, only 2.4%. This means that while the state's pension system already takes 10 cents out of every state tax dollar — and yet remains deep in the red — it's not nearly enough to pay off the promises.”
These academics are well credentialed and are on the staff of highly respected institutions of higher education (the Stanford graduate school of business and the University of Rochester graduate school of business, respectively.) Given their backgrounds and positions, one would assume they are capable of basic research and are making their claims based on solid information.
The natural reaction to the red flag they have raised regarding Rhode Island's investment returns would be to demand immediate action. There is only one problem: What they reported is false. How do I know that? Information made public by the Rhode Island retirement office regarding its investment return for the past decade, prepared by an independent consultant, shows the Rhode Island pension fund's annualized return for the 10-year period ended last Sept. 30 was 8.3%, not 2.4%. In addition, since 2010, the Rhode Island retirement plans have used an anticipated annual return of 7.5%, not the 8.25% rate claimed by the professors.
This is not an isolated incident. In an earlier report, Mr. Rauh produced what were called “run-out dates” for public plans, which led readers to believe the dates listed were when the plans were expected to run out of money. The Pew Center for the States reported it that way, and a congressman cited the information on his website as proof positive of the need for the “reform” legislation he was proposing. Naturally, the run-out dates resulted in high degrees of anxiety among both plan participants and the sponsoring agencies, and no small effort was made to clarify and correct the record for policymakers and the media. More than a year after publication of this report, the Government Accountability Office included the following in a footnote in a report of its own:
“However, the (Rauh) study was based on the assumption that benefits earned to date would only be financed out of current plan assets and not from any future contributions. The projected exhaustion dates are thus not realistic estimates of when the funds might actually run out of money.”
Of course, by the time the GAO report was distributed the damage already had been done and the GAO report garnered almost no public attention. Was the misinformation in the Rauh report on this subject a function of negligence or fraud? I do not know the answer, but it seems reasonable to limit the range of possibilities to those alternatives, and to hold academia to the same standards as a public or corporate official, given the products of their “academic research” are likely to influence the actions of others.
Keith Brainard is the Georgetown, Texas-based research director of the National Association of State Retirement Administrators.