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The Intergenerational Transfer of Public Pension Promises

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  • Robert Novy-Marx
  • Joshua D. Rauh
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    Abstract

    The value of pension promises already made by US state governments will grow to approximately $7.9 trillion in 15 years. We study investment strategies of state pension plans and estimate the distribution of future funding outcomes. We conservatively predict a 50% chance of aggregate underfunding greater than $750 billion and a 25% chance of at least $1.75 trillion (in 2005 dollars). Adjusting for risk, the true intergenerational transfer is substantially larger. Insuring both taxpayers against funding deficits and plan participants against benefit reductions would cost almost $2 trillion today, even though governments portray state pensions as almost fully funded.

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    File URL: http://www.nber.org/papers/w14343.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14343.

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    Date of creation: Sep 2008
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    Handle: RePEc:nbr:nberwo:14343

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    1. Mitchell, Olivia S & Smith, Robert S, 1994. "Pension Funding in the Public Sector," The Review of Economics and Statistics, MIT Press, vol. 76(2), pages 278-90, May.
    2. Daniel Bergstresser & Mihir Desai & Joshua Rauh, 2006. "Earnings Manipulation, Pension Assumptions, and Managerial Investment Decisions," The Quarterly Journal of Economics, MIT Press, vol. 121(1), pages 157-195, 02.
    3. Deborah Lucas, 2007. "Valuing & Hedging: Defined Benefit Pension Obligations - The Role of Stocks Revisited," Money Macro and Finance (MMF) Research Group Conference 2006 169, Money Macro and Finance Research Group.
    4. Sundaresan, Suresh & Zapatero, Fernando, 1997. "Valuation, Optimal Asset Allocation and Retirement Incentives of Pension Plans," Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 631-60.
    5. Joshua D. Rauh, 2006. "Investment and Financing Constraints: Evidence from the Funding of Corporate Pension Plans," Journal of Finance, American Finance Association, vol. 61(1), pages 33-71, 02.
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    Cited by:
    1. David G. Lenze, 2009. "Accrual Measures of Pension-Related Compensation and Wealth of State and Local Government Workers," BEA Working Papers 0054, Bureau of Economic Analysis.
    2. Raimond Maurer & Olivia S. Mitchell & Ralph Rogalla, 2008. "Managing Contribution and Capital Market Risk in a Funded Public Defined Benefit Plan: Impact of CVaR Cost Constraints," NBER Working Papers 14332, National Bureau of Economic Research, Inc.
    3. Gérard Cornilleau & Catherine Mathieu & Henri Sterdyniak & Vincent Touzé, 2010. "Les réformes des retraites en Europe dans la crise," Documents de Travail de l'OFCE 2010-17, Observatoire Francais des Conjonctures Economiques (OFCE).
    4. Ponds, E.H.M. & Severinson, C. & Yermo, J., 2012. "Implicit debt in public sector plans: An international comparison," Open Access publications from Tilburg University urn:nbn:nl:ui:12-5452874, Tilburg University.
    5. Alexandre Laurin & William B.P. Robson, 2009. "Supersized Superannuation: The Startling Fair-Value Cost of Federal Government Pensions," C.D. Howe Institute Backgrounder, C.D. Howe Institute, issue 122, December.
    6. Vincent Touzé, 2010. "Le système de retraite américain : impact de la crise et tendances de long terme," Documents de Travail de l'OFCE 2010-27, Observatoire Francais des Conjonctures Economiques (OFCE).

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