This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

  1. Home
  2. Journals
  3. Journal of Economic Perspectives
  4. Fall 2009
  5. The Liabilities and Risks of State-Sponsored Pension Plans

Journal of Economic Perspectives

ISSN 0895-3309 (Print) | ISSN 1944-7965 (Online)

The Liabilities and Risks of State-Sponsored Pension Plans

  • Robert Novy-Marx
  • Joshua D. Rauh
Journal of Economic Perspectives
vol. 23, no. 4, Fall 2009
(pp. 191–210)
Download Full Text PDF
(Complimentary)

Abstract

As of December 2008, state governments had approximately $1.94 trillion set aside in pension funds for their employees. How does the value of these assets compare to the present value of states' pension liabilities? Just as future Social Security and Medicare liabilities do not appear in the headline numbers of the U.S. federal debt, the financial liability from underfunded public pensions does not appear in the headline numbers of state debt. If pensions are underfunded, then the gap between pension assets and liabilities is off-balance-sheet government debt. We show that government accounting standards require states to use procedures that severely understate their liabilities. We then discuss the true economic funding of state public pension plans. Using market-based discount rates that reflect the risk profile of the pension liabilities, we calculate that the present value of the already-promised pension liabilities of the 50 U.S. states amount to $5.17 trillion, assuming that states cannot default on pension benefits that workers have already earned. Net of the $1.94 trillion in assets, these pensions are underfunded by $3.23 trillion. This "pension debt" dwarfs the states' publicly traded debt of $0.94 trillion. And we show that even before the market collapse of 2008, the system was economically severely underfunded, though public actuarial reports presented the plans' funding status in a more favorable light.

Citation

Novy-Marx, Robert, and Joshua D. Rauh. 2009. "The Liabilities and Risks of State-Sponsored Pension Plans." Journal of Economic Perspectives, 23 (4): 191–210. DOI: 10.1257/jep.23.4.191

JEL Classification

  • H74 State and Local Borrowing
  • H75 State and Local Government: Health, Education, and Welfare
  • J32 Nonwage Labor Costs and Benefits; Private Pensions
There are no comments for this article.
Login to Comment