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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; 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

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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