NCPA - National Center for Policy Analysis

Public Pension Promises

August 30, 2011

Robert Novy-Marx of the Simon Graduate School of Business, University of Rochester, and Joshua Rauh of the Kellogg School of Management, Northwestern University, calculate the present value of state employee pension liabilities using discount rates that reflect the risk of the payments from a taxpayer perspective in a new study in the Journal of Finance.

  • If benefits have the same default and recovery characteristics as state general obligation debt, the national total of promised liabilities based on current salary and service is $3.20 trillion.
  • If pensions have higher priority than state debt, the value of liabilities is much larger.
  • Using zero-coupon Treasury yields, which are default-free but contain other priced risks, promised liabilities are $4.43 trillion.

Liabilities are even larger under broader concepts that account for salary growth and future service.

Source: Robert Novy-Marx and Joshua Rauh, "Public Pension Promises: How Big Are They and What Are They Worth?" Journal of Finance, August 2011.


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