43 Pages Posted: 7 Jul 2008 Last revised: 16 Nov 2008
Date Written: September 2, 2008
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 Classification: G11, G18, H55, H60, H70, E62
Suggested Citation: Suggested Citation
Novy-Marx, Robert and Rauh, Joshua D., The Intergenerational Transfer of Public Pension Promises (September 2, 2008). Chicago GSB Research Paper No. 08-13. Available at SSRN: https://ssrn.com/abstract=1156477 or http://dx.doi.org/10.2139/ssrn.1156477