Public Pension Promises: How Big are They and What are They Worth?

Abstract:     
We calculate two present value measures of already-promised state pension liabilities using discount rates that reflect their risk. If benefits have the same default and recovery characteristics as general obligation debt, aggregate underfunding is $1.31 trillion. This represents a lower bound on the value of the liability to taxpayers, because pension promises typically have higher priority than state municipal debt. If states cannot default on pension benefits, underfunding is $3.23 trillion. The underfunding is even larger under broader concepts of accrued liabilities that account for projected salary growth and future service.

Keywords: public pensions, financial risk, state and local governments, portfolio choice, municipal bonds

JEL Classifications: G11, G18, H55, H60, H70, E62

Working Paper Series