The Intergenerational Transfer of Public Pension Promises

Robert Novy-Marx, Joshua D. Rauh

NBER Working Paper No. 14343
Issued in September 2008
NBER Program(s):Program on the Economics of Aging, Asset Pricing Program, Corporate Finance Program, Public Economics Program

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.

A non-technical summary of this paper is available in the November 2008 NBER Digest.  You can sign up to receive the NBER Digest by email.

Acknowledgments

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w14343

Users who downloaded this paper also downloaded* these: