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The Intergenerational Transfer of Public Pension Promises
Robert Novy-Marx University of Chicago - Booth School of Business Joshua D. Rauh Northwestern University - Department of Finance; National Bureau of Economic Research (NBER) September 2, 2008 Chicago GSB Research Paper No. 08-13 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, financial risk, state and local governments, portfolio choice JEL Classifications: G11, G18, H55, H60, H70, E62 Working Paper SeriesDate posted: July 07, 2008 ; Last revised: November 16, 2008Suggested CitationContact Information
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