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):The Program on Aging, The Asset Pricing Program, The Corporate Finance Program, The 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.

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Acknowledgments

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Document Object Identifier (DOI): 10.3386/w14343

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