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The Revenue Demands of Public Employee Pension Promises

63 Pages Posted: 16 Dec 2011 Last revised: 16 Oct 2012

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 16, 2012

Abstract

We calculate increases in contributions required to achieve full funding of state and local pension systems in the U.S. over 30 years. Without policy changes, contributions would have to increase by 2.5 times, reaching 14.1% of the total own-revenue generated by state and local governments. This represents a tax increase of $1,385 per household per year, around half of which goes to pay down legacy liabilities while half funds the cost of new promises. We examine sensitivity to asset return assumptions, wage correlations, the treatment of workers not currently in Social Security, and endogenous geographical shifts in the tax base.

Keywords: pensions, state and local government, public finance

JEL Classification: H74, H70, H31, E62, H55

Suggested Citation

Novy-Marx, Robert and Rauh, Joshua D., The Revenue Demands of Public Employee Pension Promises (September 16, 2012). Available at SSRN: https://ssrn.com/abstract=1973668 or http://dx.doi.org/10.2139/ssrn.1973668

Robert Novy-Marx (Contact Author)

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

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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