Public Pension Promises: How Big are They and What are They Worth?
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)
October 8, 2010
Journal of Finance, Forthcoming
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.
Number of Pages in PDF File: 61
Keywords: public pensions, financial risk, state and local governments, portfolio choice, municipal bonds
JEL Classification: G11, G18, H55, H60, H70, E62
Date posted: March 5, 2009 ; Last revised: October 13, 2010