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The Revenue Demands of Public Employee Pension Promises

  • Robert Novy-Marx
  • Joshua D. Rauh
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    We calculate increases in contributions required to achieve full funding of state and local pension systems in the U.S. over 30 years. Without policy changes, contributions would have to increase by 2.5 times, reaching 14.1% of the total own-revenue generated by state and local governments. This represents a tax increase of $1,385 per household per year, around half of which goes to pay down legacy liabilities while half funds the cost of new promises. We examine sensitivity to asset return assumptions, wage correlations, the treatment of workers not currently in Social Security, and endogenous geographical shifts in the tax base.

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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18489.

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    Date of creation: Oct 2012
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    Handle: RePEc:nbr:nberwo:18489
    Note: AG PE
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    1. Friedberg, Leora, 2011. "Labor market aspects of state and local retirement plans: a review of evidence and a blueprint for future research," Journal of Pension Economics and Finance, Cambridge University Press, vol. 10(02), pages 337-361, April.
    2. Luca Benzoni & Pierre Collin-Dufresne & Robert S. Goldstein, 2007. "Portfolio Choice over the Life-Cycle when the Stock and Labor Markets Are Cointegrated," Journal of Finance, American Finance Association, vol. 62(5), pages 2123-2167, October.
    3. Laibson, David I. & Madrian, Brigitte & Beshears, John & Choi, James J., 2011. "Behavioral Economics Perspectives on Public Sector Pension Plans," Scholarly Articles 4723207, Harvard Kennedy School of Government.
    4. Feldstein, Martin, 1995. "The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 551-72, June.
    5. Feldstein, Martin, 1995. "Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," Scholarly Articles 2766676, Harvard University Department of Economics.
    6. Bohn, Henning, 2010. "Should Public Retirement Plans be Fully Funded?," University of California at Santa Barbara, Economics Working Paper Series qt1cw6c8qg, Department of Economics, UC Santa Barbara.
    7. Zvi Bodie & John B. Shoven & David A. Wise, 1988. "Pensions in the U.S. Economy," NBER Books, National Bureau of Economic Research, Inc, number bodi88-1, Abril.
    8. Andrew A. Samwick & Jonathan Skinner, 2004. "How Will 401(k) Pension Plans Affect Retirement Income?," American Economic Review, American Economic Association, vol. 94(1), pages 329-343, March.
    9. Deborah J. Lucas & Stephen P. Zeldes, 2009. "How Should Public Pension Plans Invest?," American Economic Review, American Economic Association, vol. 99(2), pages 527-32, May.
    10. James Poterba & Joshua Rauh & Steven Venti & David Wise, 2006. "Defined Contribution Plans, Defined Benefit Plans, and the Accumulation of Retirement Wealth," NBER Working Papers 12597, National Bureau of Economic Research, Inc.
    11. Schieber, Sylvester J., 2011. "Political economy of public sector retirement plans," Journal of Pension Economics and Finance, Cambridge University Press, vol. 10(02), pages 269-290, April.
    12. George Pennacchi & Mahdi Rastad, 2010. "Portfolio Allocation for Public Pension Funds," NBER Working Papers 16456, National Bureau of Economic Research, Inc.
    13. Comprix, Joseph & Muller III, Karl A., 2011. "Pension plan accounting estimates and the freezing of defined benefit pension plans," Journal of Accounting and Economics, Elsevier, vol. 51(1-2), pages 115-133, February.
    14. Robert Novy-Marx & Joshua D. Rauh, 2009. "The Liabilities and Risks of State-Sponsored Pension Plans," Journal of Economic Perspectives, American Economic Association, vol. 23(4), pages 191-210, Fall.
    15. 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.
    16. Robert Novy‐Marx & Joshua Rauh, 2011. "Public Pension Promises: How Big Are They and What Are They Worth?," Journal of Finance, American Finance Association, vol. 66(4), pages 1211-1249, 08.
    17. Comprix, Joseph & Muller, Karl A., 2011. "Pension plan accounting estimates and the freezing of defined benefit pension plans," Journal of Accounting and Economics, Elsevier, vol. 51(1), pages 115-133.
    18. Jeffrey R. Brown & David W. Wilcox, 2009. "Discounting State and Local Pension Liabilities," American Economic Review, American Economic Association, vol. 99(2), pages 538-42, May.
    19. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64, pages 416.
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