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

Published online by Cambridge University Press:  10 January 2020

Gang Chen Open the ORCID record for Gang Chen [Opens in a new window] ,
David Matkin  and
Hyewon Kang
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
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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.

Keywords

Capital market assumptionsLow-return environmentpension investmentspublic pensionsstochastic simulationH72H75
Type
Article
Information
Journal of Pension Economics & Finance , Volume 20 , Issue 2 , April 2021 , pp. 169 - 186
Copyright
Copyright © The Author(s) 2020. Published by Cambridge University Press

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