Skip to main content Accessibility help
×
Home
Hostname: page-component-768ffcd9cc-2bgxn Total loading time: 0.249 Render date: 2022-11-30T08:29:28.678Z Has data issue: true Feature Flags: { "shouldUseShareProductTool": true, "shouldUseHypothesis": true, "isUnsiloEnabled": true, "useRatesEcommerce": false, "displayNetworkTab": true, "displayNetworkMapGraph": false, "useSa": true } hasContentIssue true

Costs and liabilities of US public pension systems in a low-return environment

Published online by Cambridge University Press:  10 January 2020

Gang Chen*
Affiliation:
Public Administration and Policy, University at Albany State University of New York, Albany, New York, USA
David Matkin
Affiliation:
George W. Romney Institute of Public Service and Ethics, Brigham Young University, Provo, Utah, USA
Hyewon Kang
Affiliation:
Public Administration and Policy, University at Albany State University of New York, Albany, New York, USA
*
*Corresponding author. Email: gchen3@albany.edu

Abstract

In recent years, a growing number of capital market professionals have projected a low-return environment in US investment portfolios – where returns in most asset classes are expected to drop below historical rates. While these specific forecasts may not fully materialize, it is natural for cyclical investment markets to go through extended periods of lower returns, creating significant risks for public pension systems which rely on investment returns to sustain their long-term solvency and offset budgetary contributions. This paper uses a simulation method to examine the long-term effect of a low-return environment on the unfunded liabilities and contribution costs of US public pension systems while considering the moderating effects of asset allocation strategies, amortization approaches, and contribution policies.

Type
Article
Copyright
Copyright © The Author(s) 2020. Published by Cambridge University Press

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

American Academy of Actuaries (AAA) (2012) The 80% pension funding standard myth. Available at https://www.actuary.org/sites/default/files/files/80_Percent_Funding_IB_071912.pdf.Google Scholar
Andonov, A, Bauer, R and Cremers, M (2013) Pension fund asset allocation and liability discount rates: camouflage and reckless risk taking by U.S. public plans? Netspar Discussion Paper No. 05/2012-061.Google Scholar
Anzia, SF, Rubens, AD, Finke, L, Kent, B, Tsai, T, Lynn, A and Shea, D (2019) Pensions in the trenches: how pension costs are affecting US local government. Goldman School of Public Policy Working Paper.CrossRefGoogle Scholar
Blanchett, D, Finke, M and Pfau, W (2017) Low returns and optimal retirement savings. Wharton Pension Research Council Working Papers 31.Google Scholar
BNY Mellon (2017) Staying focused in a low-return environment. Available at https://www.bnymellonwealth.com/articles/strategy/staying-focused-in-a-low-return-environment.jsp.Google Scholar
Boyd, DJ and Yin, Y (2017) Appropriateness of risk-taking by public pension plans. Pension Simulation Project. Albany, NY: The Rockefeller Institute of Government, State University of New York.Google Scholar
Cembalast, M and Gould, A (2015) What if we live in a low-return world? Implications for pension fund. Available at https://am.jpmorgan.com/gi/getdoc/1383235151422.Google Scholar
Chaney, BA, Copley, PA and Stone, MS (2002) The effect of fiscal stress and balanced budget requirements on the funding and measurement of state pension obligations. Journal of Accounting and Public Policy 21, 287313.CrossRefGoogle Scholar
Chen, G (2018) Understanding decisions in state pension systems: a system framework. The American Review of Public Administration 48, 260273.CrossRefGoogle Scholar
Chen, G and Matkin, DST (2017) Actuarial inputs and the valuation of public pension liabilities and contribution requirements: a simulation approach. Public Budgeting and Finance 37, 6887.CrossRefGoogle Scholar
Coggburn, JD and Kearney, RC (2010) Trouble keeping promises? An analysis of underfunding in state retiree benefits. Public Administration Review 70, 97108.CrossRefGoogle Scholar
Eaton, TV and Nofsinger, JR (2004) The effect of financial constraints and political pressure on the management of public pension plans. Journal of Accounting and Public Policy 23, 161189.CrossRefGoogle Scholar
Farrell, J and Shoag, D (2016) Asset management in public DB and non-DB pension plans. Journal of Pension Economics & Finance 15, 379406.CrossRefGoogle Scholar
Goldman Sachs Asset Management (GSAM) (2015) Seven is the new eight. Pension Solutions, October 2015, 1–6.Google Scholar
Government Accountability Office (GAO) (2007) State and Local Government Retiree Benefits – Current Status of Benefit Structures, Protections, and Fiscal Outlook for Funding Future Costs. GAO-07-1156. Washington, DC: GAO. Available at http://www.gao.gov/assets/270/267150.pdf.Google Scholar
Government Finance Officers Association (GFOA) (2016) Sustainable funding practices for defined benefit pensions and Other Postemployment Benefits (OPEB). Available at https://www.gfoa.org/sustainable-funding-practices-defined-benefit-pensions-and-other-postemployment-benefits-opeb.Google Scholar
Governmental Accounting Standards Board (GASB) (2012) Summary of statement No. 67 financial reporting for pension plans – an amendment of GASB statement No. 25. Available at http://www.gasb.org/jsp/GASB/Pronouncement_C/GASBSummaryPage&cid=1176160219444.Google Scholar
Horizon Actuarial Services (2016) Survey of capital market assumptions 2016 editions. Available at http://www.horizonactuarial.com/blog/2016-survey-of-capital-market-assumptions.Google Scholar
Horizon Actuarial Services (2018) Survey of capital market assumptions 2018 editions. Available at http://www.horizonactuarial.com/blog/2018-survey-of-capital-market-assumptions.Google Scholar
Liljenquist, SD (2013) Keeping the promise: state solutions for government pension reform. Available at https://www.alec.org/publication/keeping-the-promise-state-solutions-for-government-pension-reform/.Google Scholar
Matkin, DST, Chen, G and Khalid, H (2019) The governance of public pensions: an institutional framework. Administration & Society 51, 91119. Available at https://doi.org/10.1177/0095399715621945.CrossRefGoogle Scholar
McKinsey and Company (2016) Thriving in the new abnormal: North American asset management. Available at https://www.mckinsey.com/industries/financial-services/our-insights/thriving-in-the-new-abnormal-north-american-asset-management.Google Scholar
McKinsey Global Institute (2016) Diminishing returns: why investors may need to lower their expectations. Available at https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/why-investors-may-need-to-lower-their-sights.Google Scholar
Monahan, AB (2010) Public pension plan reform: the legal framework. Education 5, 617646.Google Scholar
Munnell, AH, Aubry, JP and Quinby, L (2010) The impact of public pensions on state and local budgets. State and Local Pension Plans 13. Boston, MA: Center for Retirement Research, Boston College.Google Scholar
Nation, J (2011) Pension math: how California's retirement spending is squeezing the state budget. Stanford Institute for Economic Policy Research (SIEPR).Google Scholar
Novy-Marx, R and Rauh, JD (2009) The liabilities and risks of state-sponsored pension plans. Journal of Economic Perspectives 23, 191210.CrossRefGoogle Scholar
Novy-Marx, R and Rauh, JD (2011a) Policy options for state pension systems and their impact on plan liabilities. Journal of Pension Economics & Finance 10, 173194.CrossRefGoogle Scholar
Novy-Marx, R and Rauh, JD (2011b) Public pension promises: how big are they and what are they worth? The Journal of Finance 66, 12111249.CrossRefGoogle Scholar
Peng, J and Wang, Q (2017) Affordability of public pension benefit: a historical and empirical analysis of U.S. state and local government pension contributions. Journal of Pension Economics and Finance 16, 2142.CrossRefGoogle Scholar
Pennacchi, G and Rastad, M (2011) Portfolio allocation for public pension funds. Journal of Pension Economics & Finance 10, 221245.CrossRefGoogle Scholar
Public Plan Database (PPD) (2017) Public plans data. Available at https://crr.bc.edu/data/public-plans-database/.Google Scholar
Randazzo, A (2016) Glossary of pension terminology: understand what pension terms and phrases mean. Available at https://reason.org/backgrounder/glossary-of-pension-terminology/.Google Scholar
Reilly, C and Byrne, A (2017) Investing for retirement in a low returns environment: making the right decisions to make the money last. Wharton School or the Pension Research Council WP2017-07. Available at https://repository.upenn.edu/prc_papers/33/.CrossRefGoogle Scholar
Romano, R (1993) Public pension fund activism in corporate governance reconsidered. Columbia Law Review 93, 795853.CrossRefGoogle Scholar
Stalebrink, OJ, Kriz, KA and Guo, W (2010) Prudent public sector investing and modern portfolio theory: an examination of public sector defined benefit pension plans. Public Budgeting & Finance 30, 2846.CrossRefGoogle Scholar
Standard & Poor's (2006) U.S. public finance ratings criteria. Available at https://spratings.com/uspublicfinance.Google Scholar
Steffen, K (2001) State employee pension plans. In Mitchell, OS and Hustead, ES (eds), Pension in the Public Sector. Philadelphia: University of Pennsylvania Press, pp. 4165.Google Scholar
Teachers Insurance and Annuity Association of America (TIAA) (2017) Risk on: the search for returns grows harderInvestors. Available at https://www.tiaa.org/public/pdf/2018_Outlook.pdf.Google Scholar
Vanguard (2017) Vanguard economic and market outlook for 2018: rising risks to the status quo. Available at https://pressroom.vanguard.com/nonindexed/Research-Vanguard-Market-And-Economic-Overview-120417.pdf.Google Scholar
Wang, Q and Peng, J (2016) An empirical analysis of state and local public pension plan funded ratio change, 2001–2009. The American Review of Public Administration 46, 7591.CrossRefGoogle Scholar
Wang, P, Chapman, L, Peterson, S and Spinney, J (2018) Evaluating spending policies in a low-return environment. Financial Analysts Journal 74, 1123.CrossRefGoogle Scholar
Weller, CE and Wenger, JB (2009) Prudent investors: the asset allocation of public pension plans. Journal of Pension Economics & Finance 8, 501525.CrossRefGoogle Scholar
Winklevoss, HE (1993) Pension Mathematics with Numerical Illustrations. Philadelphia: University of Pennsylvania Press.Google Scholar
1
Cited by

Save article to Kindle

To save this article to your Kindle, first ensure coreplatform@cambridge.org is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about saving to your Kindle.

Note you can select to save to either the @free.kindle.com or @kindle.com variations. ‘@free.kindle.com’ emails are free but can only be saved to your device when it is connected to wi-fi. ‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

Find out more about the Kindle Personal Document Service.

Costs and liabilities of US public pension systems in a low-return environment
Available formats
×

Save article to Dropbox

To save this article to your Dropbox account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you used this feature, you will be asked to authorise Cambridge Core to connect with your Dropbox account. Find out more about saving content to Dropbox.

Costs and liabilities of US public pension systems in a low-return environment
Available formats
×

Save article to Google Drive

To save this article to your Google Drive account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you used this feature, you will be asked to authorise Cambridge Core to connect with your Google Drive account. Find out more about saving content to Google Drive.

Costs and liabilities of US public pension systems in a low-return environment
Available formats
×
×

Reply to: Submit a response

Please enter your response.

Your details

Please enter a valid email address.

Conflicting interests

Do you have any conflicting interests? *