Trends in State and Local Pension Funds

Annual Review of Financial Economics, Volume 15, Forthcoming.

35 Pages Posted: 31 Oct 2022

See all articles by Oliver Giesecke

Oliver Giesecke

Stanford University - Hoover Institution

Joshua D. Rauh

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

Date Written: October 19, 2022

Abstract

Unfunded public pension obligations represent the largest liability for state and local governments in the United States. As of fiscal year 2021, the total reported unfunded liabilities of these plans is $1.076 trillion. In contrast, the market value of the unfunded liability is approximately $6.501 trillion. As a result, the reported funding ratio of 82.5% falls to 43.8% under a market-based valuation. The market values reflect the fact that accrued pension promises are a form of government debt with strong statutory and contractual rights. The assumed discount rates are based on expected returns and remain elevated relative to risk-free rates, despite a decline since 2014. As a result, not only is the unfunded pension liability understated, but also the yearly pension cost for newly accruing liabilities. In order to achieve high returns, pension funds have accumulated large exposure to risky assets, in particular alternative investments, which results in highly uncertain investment returns.

Keywords: Public Pensions, State and Local Government, Retirement Policies, Pension Cost, Government Debt

JEL Classification: H55, H75, J26, J45

Suggested Citation

Giesecke, Oliver and Rauh, Joshua D., Trends in State and Local Pension Funds (October 19, 2022). Annual Review of Financial Economics, Volume 15, Forthcoming., Available at SSRN: https://ssrn.com/abstract=4258469

Oliver Giesecke

Stanford University - Hoover Institution ( email )

Stanford, CA 94305
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

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