The sustainability of state and local government pensions

  • Byron Lutz Byron Lutz
  • Jamie Lenney Jamie Lenney
  • Louise Sheiner Louise Sheiner

A public finance approach

In this paper, we explore the fiscal sustainability of U.S. state and local government pensions plans. In contrast to much of the recent work on state and local pensions, which has focused on valuing pension liabilities, we adopt an approach relatively more rooted in the public finance tradition and focus on the sustainability of these pensions as on-going concerns. Specifically, we examine if under current benefit and funding policies state and local pension plans will ever become insolvent, and, if so, when. We then examine the fiscal cost of stabilizing pension debt as a share of the economy and examine the cost associated with delaying such stabilization into the future. Different time horizons over which to accomplish stabilization are explored, including over the long run, over a 30-year horizon, and immediately. We explore these questions by reverse engineering the future benefit cash flows of the pension plans using information contained in annual pension actuarial reports and government financial statements and by making long-run macroeconomic and demographic projections. Using low or moderate asset return assumptions and conservative discount rates, our results suggest that in aggregate for the U.S. as a whole, pension debt can be stabilized as a share of the economy with relatively moderate fiscal adjustments. Notably, there appear to be only modest returns to starting this stabilization process now versus a decade in the future. Of course, there is significant heterogeneity with some plans requiring very large increases to stabilize their pension debt.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.


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