The 80 Percent Pension Funding Target, High Assumed Returns, and Generational Inequity

Abstract

Generational inequity in pension funding is highly sensitive to the lax policies of 80-percent funding targets and high assumed returns to investment. I develop a simple, powerful relationship between steady-state (SS) inequity in contributions – the percent of extra contributions to fund prior cohorts – and the SS unfunded ratio. I then show how the SS unfunded ratio is governed by x-percent funding targets and the gap between assumed and true returns. The SS degree of inequity is over 60 percent under an 80 percent funding target and over 50 percent with a one point gap between assumed and true returns.

Keywords: public pensions, unfunded liabilities, generational inequity