Working Paper: NBER ID: w18491
Authors: Robert Novy-Marx; Joshua D. Rauh
Abstract: This paper calculates the effect that introducing risk-sharing during either retirement or the working life would have on public sector pension liabilities. We begin by considering the introduction of a variable annuity for the retirement phase, modeled on the Wisconsin Retirement System, in which positive benefit adjustments are granted only if asset returns surpass 5% but benefits cannot fall below their initial levels. This change would reduce unfunded accrued liabilities by around 25%, and would lower the annual contribution increases required to target full funding in 30 years by 11%. If there is no minimum benefit guarantee, the impact of introducing variable annuities is substantially larger: the unfunded liability would fall by over half and required annual contribution increases would fall by 44%. Alternative measures that have similar effects on costs include increasing employee contributions by 10.3% of pay while keeping benefits unchanged; or giving employees a collective DC plan with an employer contribution of 10% of pay for future service. We discuss these results in the context of models of lifecycle portfolio choice, which suggest that employees should generally prefer to take risk earlier in their lives rather than later.
Keywords: No keywords provided
JEL Codes: G11; G18; H31; H55; H70; H74
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| introduction of performance-linked annuity adjustments (PLAA) (G52) | unfunded accrued liabilities (H69) |
| introduction of performance-linked annuity adjustments (PLAA) (G52) | annual contribution increases (G52) |
| increasing employee contributions by 10.3% of pay (J32) | unfunded accrued liabilities (H69) |
| implementing a CDC plan with a 10% employer contribution (J32) | unfunded accrued liabilities (H69) |
| freezing defined benefit plans (H55) | cost savings (D61) |
| shifting to a CDC model (C24) | cost savings (D61) |