The Intergenerational Transfer of Public Pension PromisesRobert Novy-Marx, Joshua D. Rauh
NBER Working Paper No. 14343 The value of pension promises already made by US state governments will grow to approximately $7.9 trillion in 15 years. We study investment strategies of state pension plans and estimate the distribution of future funding outcomes. We conservatively predict a 50% chance of aggregate underfunding greater than $750 billion and a 25% chance of at least $1.75 trillion (in 2005 dollars). Adjusting for risk, the true intergenerational transfer is substantially larger. Insuring both taxpayers against funding deficits and plan participants against benefit reductions would cost almost $2 trillion today, even though governments portray state pensions as almost fully funded. An NBER digest for this paper is available. The NBER Bulletin on Aging and Health provides summaries of publications like this.
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