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Funding in Public Sector Pension Plans: International Evidence

Author

Listed:
  • Eduard Ponds

    (OECD)

  • Clara Severinson

    (OECD)

  • Juan Yermo

    (OECD)

Abstract

Most countries have separate pension plan for public sector employees. The future fiscal burden of these plans can be substantial as the government usually is the largest employer, pension promises in the public sector tend to be relatively generous, and future payments have to be paid out directly from government revenues (pay-as-you-go) or by funded plans (pension funds) which tend to be underfunded. The valuation and disclosure of these promises in some countries lacks transparency, which may be hiding potentially huge fiscal liabilities that are being passed on to future generations of workers. In order to arrive at a fair comparison between countries regarding the fiscal burden of their DB public sector pension plans, this paper gathers more evidence on public sector pension plans regarding the type of pension promise and quantifies the future tax burden related to these pension promises. The reported liabilities are recalculated using both a fair value approach (local market discount rates) and a common, fixed discount rate across all countries which reflects projected growth in national income. We also estimate for a number of plans from a sample of OECD countries the size of the net unfunded liabilities in fair value terms as of the end of 2008. This fiscal burden can also be interpreted as the implicit pension debt in fair value terms.

Suggested Citation

  • Eduard Ponds & Clara Severinson & Juan Yermo, 2011. "Funding in Public Sector Pension Plans: International Evidence," OECD Working Papers on Finance, Insurance and Private Pensions 8, OECD Publishing.
  • Handle: RePEc:oec:dafaad:8-en
    DOI: 10.1787/5kgcfnm8rgmp-en
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    References listed on IDEAS

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    1. Richard Disney & Carl Emmerson & Gemma Tetlow, 2009. "What is a Public Sector Pension Worth?," Economic Journal, Royal Economic Society, vol. 119(541), pages 517-535, November.
    2. Robert Novy-Marx & Joshua D. Rauh, 2008. "The Intergenerational Transfer of Public Pension Promises," NBER Working Papers 14343, National Bureau of Economic Research, Inc.
    3. Palacios, Robert, 2006. "Civil-service pension schemes around the world," MPRA Paper 14796, University Library of Munich, Germany.
    4. 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.
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    Citations

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    Cited by:

    1. Meijdam, A.C. & Ponds, E.H.M., 2013. "On the Optimal Degree Of Funding Of Public Sector Pension Plans," Other publications TiSEM 1c5b7af1-e1ee-4d01-a341-f, Tilburg University, School of Economics and Management.
    2. Chen, Damiaan & van Wijnbergen, Sweder, 2022. "Redistributive Consequences of Abolishing Uniform Contribution Policies in Pension Funds," CEPR Discussion Papers 12497, C.E.P.R. Discussion Papers.
    3. Landon, Stuart & Smith, Constance, 2018. "Does a Discount Rate Rule Ensure a Pension Plan Can Pay Promised Benefits without Excessive Asset Accumulation?," Working Papers 2018-1, University of Alberta, Department of Economics.
    4. Chen, Damiaan H.J. & Beetsma, Roel M.W.J. & Broeders, Dirk W.G.A. & Pelsser, Antoon A.J., 2017. "Sustainability of participation in collective pension schemes: An option pricing approach," Insurance: Mathematics and Economics, Elsevier, vol. 74(C), pages 182-196.
    5. Damiaan Chen & Roel Beetsma & Dirk Broeders, 2015. "Stability of participation in collective pension schemes: An option pricing approach," DNB Working Papers 484, Netherlands Central Bank, Research Department.
    6. Lekniūtė, Zina & Beetsma, Roel & Ponds, Eduard, 2019. "U.S. municipal yields and unfunded state pension liabilities," Journal of Empirical Finance, Elsevier, vol. 53(C), pages 15-32.
    7. Damiaan H. J. Chen & Sweder J. G. Wijnbergen, 2020. "Redistributive Consequences of Abolishing Uniform Contribution Policies in Pension Funds," De Economist, Springer, vol. 168(3), pages 305-341, September.
    8. Ponds, E.H.M. & Severinson, C. & Yermo, J., 2012. "Implicit debt in public sector plans : An international comparison," Other publications TiSEM 8263bb65-8b50-4890-9252-0, Tilburg University, School of Economics and Management.
    9. Marhanum Che Mohd Salleh & Mohammad Abdul Matin Chowdhury & Siti Salwani Razali & Nan Nurhidayu Megat Laksana, 2020. "Retirement Schemes, its Challenges and Ways of Reformation: A Cross-Border Study," International Journal of Asian Social Science, Asian Economic and Social Society, vol. 10(9), pages 507-520, September.
    10. Damiaan H. J. Chen & Sweder J. G. Wijnbergen, 2020. "Redistributive Consequences of Abolishing Uniform Contribution Policies in Pension Funds," De Economist, Springer, vol. 168(3), pages 305-341, September.
    11. Lekniute, Z. & Beetsma, R.M.W.J. & Ponds, Eduard, 2016. "Fooling the Market? Municipal Yields and Unfunded State Pension Liabilities," Other publications TiSEM 591eb14d-c598-4297-a775-7, Tilburg University, School of Economics and Management.

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    More about this item

    Keywords

    actuarial evaluation; defined benefit; fair value; funding; hybrid plans; pension fund; public sector pensions;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • H75 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Government: Health, Education, and Welfare
    • H83 - Public Economics - - Miscellaneous Issues - - - Public Administration
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions

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