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

61 Pages Posted: 5 Mar 2009 Last revised: 13 Oct 2010

Robert Novy-Marx

Simon Business School, University of Rochester; National Bureau of Economic Research (NBER)

Joshua D. Rauh

Stanford Graduate School of Business; Hoover Institution; National Bureau of Economic Research (NBER)

Date Written: October 8, 2010

Abstract

We calculate the present value of state employee pension liabilities as of June 2009 using discount rates that reflect the risk of the payments from a taxpayer perspective. If benefits have the same default and recovery characteristics as state general obligation debt, the national total of promised liabilities based on current salary and service is $3.20 trillion. If pensions have higher priority than state debt, the present value of liabilities is much larger. Using zero-coupon Treasury yields, which are default-free but contain other priced risks, promised liabilities are $4.43 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 Classification: G11, G18, H55, H60, H70, E62

Suggested Citation

Novy-Marx, Robert and Rauh, Joshua D., Public Pension Promises: How Big are They and What are They Worth? (October 8, 2010). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1352608 or http://dx.doi.org/10.2139/ssrn.1352608

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

Hoover Institution ( email )

Stanford, CA 94305-6010
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Register to support our free research

Register

Paper statistics

Downloads
5,351
rank
1,112
Abstract Views
26,655
PlumX