THE 80% PENSION FUNDING TARGET, HIGH ASSUMED RETURNS, AND GENERATIONAL INEQUITY

Robert M. Costrell

Contemporary Economic Policy, 2018, vol. 36, issue 3, 493-504

Abstract: Generational inequity in pension funding is highly sensitive to the lax policies of 80% funding targets and high assumed returns to investment. I develop a simple, powerful relationship between steady‐state (SS) inequity in contributions—the percent of extra contributions to fund prior cohorts—and the SS unfunded ratio. I then show how the SS unfunded ratio is governed by x% funding targets and the gap between assumed and true returns. The SS degree of inequity is over 60% under an 80% funding target and over 50% with a one‐point gap between assumed and true returns. (JEL H75)

Date: 2018
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