The Intergenerational Transfer of Public Pension Promises
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.
We are grateful to Adam Friedlan, Jerry Chao, and Wai Keong Ng for research assistance. We thank the Global Association of Risk Professionals (GARP) Risk Management Research Program, Netspar, and the Chicago GSB Initiative on Global Markets (IGM) for support. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
- There is a two-thirds chance that state pension plans will realize a shortfall in 15 years. The expected conditional shortfall is almost...