The Intergenerational Transfer of Public Pension Promises
Simon Business School, University of Rochester; National Bureau of Economic Research (NBER)
Joshua D. Rauh
Stanford Graduate School of Business; National Bureau of Economic Research (NBER)
September 2, 2008
Chicago GSB Research Paper No. 08-13
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.
Number of Pages in PDF File: 43
Keywords: public pensions, financial risk, state and local governments, portfolio choice
JEL Classification: G11, G18, H55, H60, H70, E62
Date posted: July 7, 2008 ; Last revised: November 16, 2008
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