Trends in State and Local Pension Funds

Posted: 7 Nov 2023

See all articles by Joshua D. Rauh

Joshua D. Rauh

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

Oliver Giesecke

Stanford University - Hoover Institution

Multiple version iconThere are 2 versions of this paper

Date Written: November 2023

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 are $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 the yearly pension cost for newly accruing liabilities is also understated. 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.

Suggested Citation

Rauh, Joshua D. and Giesecke, Oliver, Trends in State and Local Pension Funds (November 2023). Annual Review of Financial Economics, Vol. 15, pp. 221-238, 2023, Available at SSRN: https://ssrn.com/abstract=4622180 or http://dx.doi.org/10.1146/annurev-financial-110921-022054

Joshua D. Rauh (Contact Author)

Stanford Graduate School of Business ( email )

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Hoover Institution ( email )

Stanford, CA 94305-6010
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National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Oliver Giesecke

Stanford University - Hoover Institution ( email )

Stanford, CA 94305
United States

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