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The Intergenerational Transfer of Public Pension Promises

42 Pages Posted: 23 Sep 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 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.

Suggested Citation

Novy-Marx, Robert and Rauh, Joshua D., The Intergenerational Transfer of Public Pension Promises (September 2008). NBER Working Paper No. w14343. Available at SSRN: https://ssrn.com/abstract=1271376

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 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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