Hostname: page-component-78c5997874-8bhkd Total loading time: 0 Render date: 2024-11-11T03:22:26.276Z Has data issue: false hasContentIssue false
  • English
  • Français

Affordability of public pension benefit: a historical and empirical analysis of US state and local government pension contributions

Published online by Cambridge University Press:  22 September 2015

JUN PENG  and
QIUSHI WANG
JUN PENG
Affiliation:
School of Government and Public Policyn, University of Arizona, 315 Social Sciences, Tucson, Arizona, USA
QIUSHI WANG*
Affiliation:
School of Public Affairs and Administration, Rutgers University at Newark, 111 Washington Street, Newark, New Jersey, USA
*
(e-mail: qshwang@rutgers.edu)
Get access Rights & Permissions [Opens in a new window]

Abstract

As a result of the two severe stock market declines since 2000, there has been a steady debate about the affordability of state and local public pension benefits. We measured the affordability of pension benefits in terms of governments’ ability to make the required contributions based on existing tax and revenue bases. We conducted a historical analysis of government pension contributions at national and state level over a 20-year period 1992–2011 and found that the real pension burdens have increased over this period. We also found substantial variation in pension burdens among the 50 states. The results of our empirical analysis showed that employee contribution share, investment return, size of the public workforce, and pension benefit level had significant effects on pension burdens. Based on these findings, we proposed several strategies for reducing pension burdens, including increasing employee pension contribution, reducing size of workforce, and improving pension investment performance.

Keywords

H75H71Public pension planspension burdenpension contributionaffordability
Type
Articles
Information
Journal of Pension Economics & Finance , Volume 16 , Issue 1 , January 2017 , pp. 21 - 42
Copyright
Copyright © Cambridge University Press 2015 

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

Chaney, Barbara A., Copley, Paul A., and Stone, Mary S. (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(4–5): 287–313.CrossRefGoogle Scholar
Coggburn, Jerrell D. and Kearney, Richard C. (2010) Trouble keeping promises? An analysis of underfunding in state retiree benefits. Public Administration Review, 70(1): 97–108.Google Scholar
Costrell, Robert M. and Podgursky, Michael (2009) Peaks, cliffs, and valleys: the peculiar incentives in teacher retirement systems and their consequences for school staffing. Education Finance and Policy, 4(2): 175–211.Google Scholar
Giertz, J. Fred and Papke, Leslie E. (2007) Public pension plans: myths and realities for state budgets. National Tax Journal, 60(2): 305–323.Google Scholar
Hess, David (2005) Protecting and politicizing public pension fund assets: empirical evidence on the effects of governance structures and practices. University of California Davis Law Review, 39: 187–224.Google Scholar
Hirsch, Barry T. and Macpherson, David A. (2003) Union membership and coverage database from the current population survey: note. Industrial and Labor Relations Review, 56(2): 349–354.Google Scholar
Johnson, Richard W. (1997) Pension underfunding and liberal retirement benefits among state and local government workers. National Tax Journal, 50(1): 113–142.Google Scholar
Marks, Barry R., Raman, K. K. and Wilson, Earl R. (1988) Toward understanding the determinants of pension underfunding in the public sector. Journal of Accounting and Public Policy, 7: 157–183.CrossRefGoogle Scholar
Mitchell, Olivia S. and Hsin, Ping Ling (1997) Public sector pension governance and performance. In Valdes, Salvador-Preito (eds), The Economics of Pensions: Principles, Policies, and International Experience. Cambridge, UK: Cambridge University Press, pp. 92–126.Google Scholar
Mitchell, Olivia S. and Smith, Robert S. (1994) Pension funding in the public sector. Review of Economics and Statistics, 76(2): 278–290.Google Scholar
Munnell, Alicia H., Aubry, Jean-Pierre and Hurwitz, Joshua (2013) Locally-administered pension plans: 2007–2011 (State and local pension plans, No. 29, 2013). Center for Retirement Research at Boston College.Google Scholar
Munnell, Alicia H., Aubry, Jean-Pierre and Cafarelli, Mark (2014) An update on pension obligation bonds. Washington, DC: Center for State & Local Government Excellence. Available online at http://slge.org/wp-content/uploads/2014/07/An_Update_on_Pension_Obligation_Bonds.pdf [accessed 6 November 2014].Google Scholar
Munnell, Alicia H., Haverstick, Kelly and Aubry, Jean-Pierre (2008 a) Why does funding status vary among state and local plans? (State and Local Pension Plans, No. 6, 2008). Center for Retirement Research at Boston College.Google Scholar
Munnell, Alicia H., Haverstick, Kelly, Aubry, Jean-Pierre and Golub-Sass, Alex (2008 b) Why don't some states and localities pay their required pension contributions? (State and local pension plans, No. 7, 2008). Center for Retirement Research at Boston College.Google Scholar
National Association of State Retirement Administrators (2013) Public fund survey: summary of findings for FY 2012. Available online at http://www.publicfundsurvey.org/publicfundsurvey/sum-maryoffindings.html [accessed 21 September 2014].Google Scholar
National Governors Association (2014) Former governor's bios. Available online at http://www.nga.org/cms/Forme-rGovBios?inOffice=Any&state=483f0da5-9903-44f8-809a-4e05e503d75a&nbrterms=Any-&sex=Any&race=Any&birthState=Any&submit=Search&begin=0&pagesize=100#results [accessed 6 November 2014].Google Scholar
Nuschler, Dawn, Shelton, Alison M. and Topoleski, John J. (2011) Social Security: Mandatory Coverage of New State and Local Government Employees. Washington, DC: Congressional Research Service (CRS). Available online at http://www.nasra.org/Files/Topical%20Reports/Social%20Security/-CRS%202011%20Report.pdf [accessed 20 September 2014].Google Scholar
Pew Research Center (2010) The trillion dollar gap: underfunded state retirement systems and the road to reform. Available online at http://www.pewtrusts.org/en/research-and-analysis/reports/2010/02/10/the-trillion-dollar-gap [accessed 18 October 2014].Google Scholar
Pew Research Center (2011) The widening gap: the Great Recession's impact on state pension and retiree health care costs. Available online at http://www.pewtrusts.org/uploadedFiles/wwwpewtrustsorg/Reports/State_policy/State_Pensions_Health_Care_Retiree_Benefits.pdf [accessed 18 October 2014].Google Scholar
Pew Research Center (2012) The widening gap update. Available online at http://www.pewtrusts.org/en/research-and-analysis/reports/0001/01/01/the-widening-gap-update [accessed 18 October 2014].Google Scholar
Pew Research Center (2013) A widening gap in cities: shortfalls in funding for pension and retiree health care. Available online at http://www.pewtrusts.org/en/research-and-analysis/reports/0001/01/01/a-widening-gap-in-cities [accessed 18 October 2014].Google Scholar
Pew Research Center (2014) The fiscal health of state pension plans: funding gap continues to grow. Available online at http://www.pewtrusts.org/en/research-and-analysis/analysis/2014/04/08/the-fiscal-health-of-state-pension-plans-funding-gap-continues-to-grow [accessed 18 October 2014].Google Scholar
Public Plans Database (2001–2013) Center for Retirement Research at Boston College, Center for State and Local Government Excellence, and National Association of State Retirement Administrators.Google Scholar
Securities Industry and Financial Markets Association (2014) US bond market issuance and outstanding. Available online at http://www.sifma.org/research/statistics.aspx [accessed 18 October 2014].Google Scholar
Splinter, David (2011) State pension contributions and fiscal stress. Working paper, Rice University. Available online at https://www.aeaweb.org/aea/2012conference/program/retrieve.php?pdfid=175 [accessed 1 September 2014].Google Scholar
Stalebrink, O. J. (2014) Public pension funds and assumed rates of return: an empirical examination of public sector defined benefit pension plans. American Review of Public Administration, 44(1): 92–111.Google Scholar
Standard & Poor's (2014) U.S. State pension funding: strong investment returns could lift funded ratios, but longer-term challenges remain. Available online at http://www.standardandpoors.com-/spf/upload/Events_US/US_PF_Webcast_Pensart1.pdf [accessed 22 September 2014].Google Scholar
U.S. Bureau of Economic Analysis. National economic accounts. Available online at http://www.bea.gov/national/index.htm#gdp [accessed 10 May 2015].Google Scholar
U.S. Census Bureau (2011 a) Annual survey of public pensions: State and local data 1992–2011. Available online at http://www.census.gov/govs/retire/ [accessed 1 September 2014].Google Scholar
U.S. Census Bureau (2011 b) State and local government finances. Available online at http://www.census.gov/govs/local/ [accessed 22 September 2014].Google Scholar
U.S. Census Bureau (2011 c) Government employment and payroll. Available online at http://www.census.gov/govs.apes [accessed 1 September 2014].Google Scholar
Vermeer, Thomas E., Styles, Alan K. and Patton, Terry K. (2010) Are local governments adopting optimistic actuarial methods and assumptions for defined benefit plans? Journal of Public Budgeting, Accounting and Financial Management, 22(4): 511–542.Google Scholar
Waisanen, Bert (2010) State tax and expenditure limits - 2010. Washington, DC: National Conference of State Legislature. Available online at http://www.ncsl.org/research/fiscal-policy/state-tax-and-expenditure-limits-2010.aspx [accessed 22 September 2014].Google Scholar
Wang, Qiushi and Peng, Jun (2014) An empirical analysis of state and local public pension plan funded ratio change, 2001–2009. American Review of Public Administration. Prepublished July 24th, 2014. doi: 10.1177/0275074014544196.Google Scholar