Policy Options for State Pension Systems and Their Impact on Plan Liabilities

Joshua Rauh and Robert Novy-Marx

No 16453, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We calculate the present value of state pension liabilities under existing policies, and separately under policy changes that would affect pension payouts including cost of living adjustments (COLAs), retirement ages, and buyout schedules for early retirement. Liabilities if plans were frozen as of June 2009 would be $3.2 trillion if capitalized using taxable municipal curves, which credit states for a possibility of default in the same states of the world as general obligation debt, and $4.4 trillion using the Treasury curve. Under the typical actuarial method of recognizing future service and wage increases, liabilities are $3.6 trillion and $5.2 trillion using municipal curves and Treasury curves respectively. Compared to $1.8 trillion in pension fund assets, the baseline level of unfunded liabilities is therefore around $3 trillion under Treasury rates. A one percentage point reduction in COLAs would reduce total liabilities by 9‐11%, implementing actuarially fair early retirement could reduce them by 2‐5%, and raising the retirement age by one year would reduce them by 2‐4%. Even relatively dramatic policy changes, such as the elimination of COLAs or the implementation of Social Security retirement age parameters, would leave liabilities around $1.5 trillion more than plan assets under Treasury discounting. This suggests that taxpayers will bear the lion's share of the costs associated with the legacy liabilities of state DB pension plans.

JEL-codes: G23 H55 H7 H70 H72 H74 (search for similar items in EconPapers)
Date: 2010-10
Note: PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Published as Novy-Marx, Robert and Joshua D. Rauh. "Policy Options for State Pension Systems and Their Impact on Plan Liabilities." Journal of Pension Economics and Finance 10, 2 (2011): 173-194.
Published as Policy Options for State Pension Systems and Their Impact on Plan Liabilities , Robert Novy-Marx, Joshua D. Rauh. in The Economics of State and Local Pensions , Brown and Clark. 2011

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