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Public pension funding in practice

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  • MUNNELL, ALICIA H.
  • AUBRY, JEAN-PIERRE
  • QUINBY, LAURA

Abstract

Public pension funding has recently become a front-burner policy issue in the wake of the financial crisis and given the pending retirement of large numbers of baby boomers. This paper examines the current funding of state and local pensions using a sample of 126 plans, estimating an aggregate funded ratio in 2009 of 78 percent. Projections for 2010-2013 suggest that some continued deterioration is likely. Funded status can vary significantly among plans, so the paper explores the influence of four types of factors: funding discipline, plan governance, plan characteristics, and the fiscal situation of the state. Judging the adequacy of funding requires more than just a snapshot of assets and liabilities, so the paper examines how well plans are meeting their Annual Required Contribution and what factors influence whether they make them. The paper also addresses the controversy over what discount rate to use for valuing liabilities, concluding that using a riskless rate of return could help improve funding discipline but would need to be implemented in a manageable way. Finally, the paper assesses whether plans face a near-term liquidity crisis and finds that most have assets on hand to cover benefits over the next 15-20 years. The bottom line is that, like private investors, public plans have been hit hard by the financial crisis and their full recovery is dependent on the rebound of the economy and the stock market.

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Bibliographic Info

Article provided by Cambridge University Press in its journal Journal of Pension Economics and Finance.

Volume (Year): 10 (2011)
Issue (Month): 02 (April)
Pages: 247-268

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Handle: RePEc:cup:jpenef:v:10:y:2011:i:02:p:247-268_00

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References

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  1. Jeffrey R. Brown & David W. Wilcox, 2009. "Discounting State and Local Pension Liabilities," American Economic Review, American Economic Association, vol. 99(2), pages 538-42, May.
  2. Francis M. Vitagliano & Richard W. Kopcke & Zhenya Karamcheva, 2010. "Reducing Costs of 401(k) Plans with ETFs and Commingled Trusts," Issues in Brief ib2010-11, Center for Retirement Research, revised Jul 2010.
  3. Johnson, R.W., 1995. "Pension Underfunding and Liberal Retirement Benefits Among State and Local Government Workers," Papers 95-04, RAND - Labor and Population Program.
  4. Alicia H. Munnell & Annika Sunden, . "Investment Practices of State and Local Pension Funds: Implications for Social Security Reform," Pension Research Council Working Papers 99-9, Wharton School Pension Research Council, University of Pennsylvania.
  5. Alicia H. Munnell & Jean-Pierre Aubry & Laura Quinby, 2010. "The Funding of State and Local Pensions: 2009-2013," Issues in Brief slp10, Center for Retirement Research, revised Apr 2010.
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Cited by:
  1. Jeffrey R. Brown & Robert Clark & Joshua Rauh, 2011. "The Economics of State and Local Public Pensions," NBER Working Papers 16792, National Bureau of Economic Research, Inc.
  2. Meijdam, A.C. & Ponds, E.H.M., 2013. "Optimal Degree Of Funding Of Public Sector Pension Plans," Discussion Paper 2013-011, Tilburg University, Center for Economic Research.

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