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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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    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. Joachim Inkmann & David Blake, 2004. "Liability valuation and optimal asset allocation," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 24754, London School of Economics and Political Science, LSE Library.
    2. Daniel Bergstresser & Mihir Desai & Joshua Rauh, 2006. "Earnings Manipulation, Pension Assumptions, and Managerial Investment Decisions," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 121(1), pages 157-195, 02.
    3. Joshua D. Rauh, 2006. "Investment and Financing Constraints: Evidence from the Funding of Corporate Pension Plans," Journal of Finance, American Finance Association, American Finance Association, vol. 61(1), pages 33-71, 02.
    4. Deborah Lucas, 2007. "Valuing & Hedging: Defined Benefit Pension Obligations - The Role of Stocks Revisited," Money Macro and Finance (MMF) Research Group Conference 2006, Money Macro and Finance Research Group 169, Money Macro and Finance Research Group.
    5. Olivia S. Mitchell & Robert S. Smith, 1991. "Pension Funding in the Public Sector," NBER Working Papers 3898, National Bureau of Economic Research, Inc.
    6. 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.
    7. Sundaresan, Suresh & Zapatero, Fernando, 1997. "Valuation, Optimal Asset Allocation and Retirement Incentives of Pension Plans," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 10(3), pages 631-60.
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    Cited by:
    1. 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.
    2. Vincent Touzé, 2010. "Le système de retraite américain : impact de la crise et tendances de long terme," Documents de Travail de l'OFCE, Observatoire Francais des Conjonctures Economiques (OFCE) 2010-27, Observatoire Francais des Conjonctures Economiques (OFCE).
    3. 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, Board of Governors of the Federal Reserve System (U.S.) 2013-23, Board of Governors of the Federal Reserve System (U.S.).
    4. repec:spo:wpecon:info:hdl:2441/eu4vqp9ompqllr09hai2o91j4 is not listed on IDEAS
    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, C.D. Howe Institute, issue 122, December.
    6. 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.
    7. repec:nbr:nberwo:14332 is not listed on IDEAS
    8. Ponds, E.H.M. & Severinson, C. & Yermo, J., 2012. "Implicit debt in public sector plans: An international comparison," Open Access publications from Tilburg University, Tilburg University urn:nbn:nl:ui:12-5452874, Tilburg University.
    9. 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.
    10. Gérard Cornilleau & Catherine Mathieu & Henri Sterdyniak & Vincent Touzé, 2010. "Les réformes des retraites en Europe dans la crise," Documents de Travail de l'OFCE, Observatoire Francais des Conjonctures Economiques (OFCE) 2010-17, Observatoire Francais des Conjonctures Economiques (OFCE).
    11. repec:spo:wpecon:info:hdl:2441/5l6uh8ogmqildh09h8492c58l is not listed on IDEAS
    12. David G. Lenze, 2009. "Accrual Measures of Pension-Related Compensation and Wealth of State and Local Government Workers," BEA Working Papers, Bureau of Economic Analysis 0054, Bureau of Economic Analysis.

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