TY - JOUR AU - Rauh,Joshua AU - Novy-Marx,Robert TI - Policy Options for State Pension Systems and Their Impact on Plan Liabilities JF - National Bureau of Economic Research Working Paper Series VL - No. 16453 PY - 2010 Y2 - October 2010 UR - http://www.nber.org/papers/w16453 L1 - http://www.nber.org/papers/w16453.pdf N1 - Author contact info: Joshua Rauh Stanford Graduate School of Business Stanford University Knight Management Center 655 Knight Way Stanford, CA 94305-7298 Tel: 650-723-9898 Fax: 650-725-6152 E-Mail: Rauh_Joshua@gsb.stanford.edu Robert Novy-Marx Simon Graduate School of Business University of Rochester 305 Schlegel Hall Rochester, NY 14627 Tel: 773/834-7123 E-Mail: Robert.Novy-Marx@Simon.Rochester.edu M2 - featured in NBER digest on 2011-03-01 M3 - presented at "State and Local Pensions Conference", August 19-20, 2010 AB - We calculate the present value of state pension liabilities under existing policies, and separately under policy changes that would affect pension payouts including cost of living adjustments (COLAs), retirement ages, and buyout schedules for early retirement. Liabilities if plans were frozen as of June 2009 would be $3.2 trillion if capitalized using taxable municipal curves, which credit states for a possibility of default in the same states of the world as general obligation debt, and $4.4 trillion using the Treasury curve. Under the typical actuarial method of recognizing future service and wage increases, liabilities are $3.6 trillion and $5.2 trillion using municipal curves and Treasury curves respectively. Compared to $1.8 trillion in pension fund assets, the baseline level of unfunded liabilities is therefore around $3 trillion under Treasury rates. A one percentage point reduction in COLAs would reduce total liabilities by 9‐11%, implementing actuarially fair early retirement could reduce them by 2‐5%, and raising the retirement age by one year would reduce them by 2‐4%. Even relatively dramatic policy changes, such as the elimination of COLAs or the implementation of Social Security retirement age parameters, would leave liabilities around $1.5 trillion more than plan assets under Treasury discounting. This suggests that taxpayers will bear the lion's share of the costs associated with the legacy liabilities of state DB pension plans. ER -