Public pension funding in practice
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% using GASB accounting methods. Projections for 2010–2013 suggest that some continued deterioration is likely. Funded status can vary significantly among plans, and 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 long-term health of plans requires more than just a snapshot of assets and liabilities, and so the paper examines how well plans are meeting their Annual Required Contributions 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.
Volume (Year): 10 (2011)
Issue (Month): 02 (April)
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- Johnson, R.W., 1995. "Pension Underfunding and Liberal Retirement Benefits Among State and Local Government Workers," Papers 95-04, RAND - Labor and Population Program.
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- Olivia S. Mitchell & Ping Lung Hsin, 1994. "Public Sector Pension Governance and Performance," NBER Working Papers 4632, National Bureau of Economic Research, Inc.
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- 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.
- Olivia S. Mitchell & Roderick Carr, .
"State and Local Pension Plans,"
Pension Research Council Working Papers
95-13, Wharton School Pension Research Council, University of Pennsylvania.
- Tongxuan (Stella) Yang & Olivia S. Mitchell, 2008. "Public Sector Pension Governance, Funding and Performance: A Longitudinal Appraisal," Chapters, in: Pension Fund Governance, chapter 8 Edward Elgar Publishing.
- 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.
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