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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. 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.
    2. Giertz, J. Fred & Papke, Leslie E., 2007. "Public Pension Plans: Myths and Realities for State Budgets," National Tax Journal, National Tax Association, vol. 60(2), pages 305-23, June.
    3. Olivia S. Mitchell & Robert S. Smith, 1991. "Pension Funding in the Public Sector," NBER Working Papers 3898, National Bureau of Economic Research, Inc.
    4. 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.
    5. 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.
    6. 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. 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).
    2. 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).
    3. repec:spo:wpecon:info:hdl:2441/eu4vqp9ompqllr09hai2o91j4 is not listed on IDEAS
    4. 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.
    5. Susan Thorp & Hardy Hulley & Rebecca McKibbin & Andreas Pedersen, 2009. "Means-Tested Income Support, Portfolio Choice And Decumulation In Retirement," CAMA Working Papers 2009-12, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    6. Joshua Rauh & Robert Novy-Marx, 2010. "Policy Options for State Pension Systems and Their Impact on Plan Liabilities," NBER Working Papers 16453, National Bureau of Economic Research, Inc.
    7. 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.
    8. Maurer, Raimond & Mitchell, Olivia S. & Rogalla, Ralph, 2009. "Managing contribution and capital market risk in a funded public defined benefit plan: Impact of CVaR cost constraints," Insurance: Mathematics and Economics, Elsevier, vol. 45(1), pages 25-34, August.
    9. 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.
    10. Javed I. Ahmed & Brad M. Barber & Terrance Odean, 2013. "Made poorer by choice: worker outcomes in Social Security v. private retirement accounts," Finance and Economics Discussion Series 2013-23, Board of Governors of the Federal Reserve System (U.S.).
    11. repec:spo:wpecon:info:hdl:2441/5l6uh8ogmqildh09h8492c58l is not listed on IDEAS
    12. 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.

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