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The Intergenerational Transfer of Public Pension Promises

43 Pages Posted: 7 Jul 2008 Last revised: 16 Nov 2008

Robert Novy-Marx

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)

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Date Written: September 2, 2008

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 Classification: G11, G18, H55, H60, H70, E62

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

Robert Novy-Marx

Simon Business School, University of Rochester ( email )

Rochester, NY 14627
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Joshua D. Rauh (Contact Author)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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