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 the risk of the payments from a taxpayer perspective under different conditions. If benefits have the same default and recovery characteristics as general obligation debt, liabilities across all 50 states amount to $3.21 trillion. This calculation probably understates the liability, because pension promises typically have higher priority than state municipal debt. Using zero-coupon Treasury yields, which are default-free but contain other priced risks that may not be relevant for pension liabilities, total liabilities are $5.20 trillion. Liabilities are even larger under broader concepts 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