Working Paper: NBER ID: w14343
Authors: Robert Novy-Marx; Joshua D. Rauh
Abstract: The value of pension promises already made by US state governments will grow to approximately $7.9 trillion in 15 years. We study investment strategies of state pension plans and estimate the distribution of future funding outcomes. We conservatively predict a 50% chance of aggregate underfunding greater than $750 billion and a 25% chance of at least $1.75 trillion (in 2005 dollars). Adjusting for risk, the true intergenerational transfer is substantially larger. Insuring both taxpayers against funding deficits and plan participants against benefit reductions would cost almost $2 trillion today, even though governments portray state pensions as almost fully funded.
Keywords: public pensions; underfunding; intergenerational transfers
JEL Codes: G11; G23; G28; H55; H60; H68; H72; H74
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Underfunding of state pensions (H55) | Significant financial burdens on future generations (H60) |
| Poor economic performance (P17) | Significant financial burdens on future generations (H60) |
| Current accounting practices (M41) | False impression of pension plan solvency (H55) |
| Unchanged investment strategies (G11) | Substantial risk of underfunding (G33) |
| Underfunding probabilities (D80) | True intergenerational transfer of public pension promises (H55) |
| Poor investment returns (G11) | Significant liabilities (G32) |