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Another look at the determinants of the financial condition of state pension plans

Author

Listed:
  • James R. Barth

    (Auburn University)

  • Sunghoon Joo

    (Auburn University)

  • Kang Bok Lee

    (Auburn University)

Abstract

Given the financial troubles facing state pension plans in recent years, we examine determinants of the ratio of assets to liabilities, or the funded ratio, based on data for 153 pension plans from 2001 to 2014. The focus is on the relationship between both the actual investment return on pension assets and the assumed return used to discount pension liabilities, or the funded ratio. Importantly, only when appropriate empirical techniques are employed to address potential econometric problems do we find that these two factors have the expected relationship with the funded ratio. Surprisingly, we also find the actual and assumed returns are negatively correlated, even though the correlation is quite low. Furthermore, the assumed return is on average higher than the actual return and has a much larger marginal effect on the funded ratio. We therefore show how a relatively high value can be assigned to the assumed return to make a pension plan appear to far healthier than actually is the case.

Suggested Citation

  • James R. Barth & Sunghoon Joo & Kang Bok Lee, 2018. "Another look at the determinants of the financial condition of state pension plans," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 42(3), pages 421-450, July.
    • Handle: RePEc:spr:jecfin:v:42:y:2018:i:3:d:10.1007_s12197-017-9402-1
    DOI: 10.1007/s12197-017-9402-1
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    References listed on IDEAS

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    More about this item

    Keywords

    Pensions; Funded ratios; Defined benefit plans; State retirement systems;
    All these keywords.

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • H75 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Government: Health, Education, and Welfare

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