A Value-Based Approach to the Redesign of US State Pension Plans

39 Pages Posted: 20 May 2014

See all articles by Zina Lekniute

Zina Lekniute

University of Amsterdam

Roel M. W. J. Beetsma

University of Amsterdam - Research Institute in Economics & Econometrics (RESAM); European Commission; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); Tinbergen Institute; Netspar

Eduard H.M. Ponds

Algemene Pensioen Groep (APG); Tilburg University - Department of Economics; Netspar; Tilburg University - Center for Economic Research (CentER)

Date Written: May 18, 2014

Abstract

This paper explores the financial sustainability of a typical U.S. state defined benefit pension fund under the continuation of current policies and under alternative policies, such as changes in contribution, indexation and investment allocation policies. We explore the "classic" asset-liability management (ALM) results, which indicate that a policy of conditional indexation may substantially improve the financial position of the fund. We also investigate the value-based ALM results, which provide a market-based evaluation of the net benefit changes to the various stakeholders of changes in the fund's policies. All cohorts of participants derive a substantial net benefit from the current pension contract, implying that tax payers have to make substantial contributions. The aforementioned adjustment measures can be instrumental in alleviating the burden on the tax payer, although this will happen at the cost of a reduction in the value of the contract to the fund participants.

Keywords: US state civil servants pension funds, underfunding, value-based ALM, contributions, benefits, indexation, participants, tax payers

JEL Classification: G23, H60

Suggested Citation

Lekniute, Zina and Beetsma, Roel M. W. J. and Ponds, Eduard H.M., A Value-Based Approach to the Redesign of US State Pension Plans (May 18, 2014). Available at SSRN: https://ssrn.com/abstract=2438637 or http://dx.doi.org/10.2139/ssrn.2438637

Zina Lekniute

University of Amsterdam ( email )

Spui 21
Amsterdam, 1018 WB
Netherlands

Roel M. W. J. Beetsma

University of Amsterdam - Research Institute in Economics & Econometrics (RESAM) ( email )

P.O.Box 15867
Amsterdam
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+31 20 525 5280 (Phone)

European Commission ( email )

Rue de la Loi 200
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Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

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Germany

HOME PAGE: http://www.CESifo.de

Tinbergen Institute ( email )

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Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Eduard H.M. Ponds (Contact Author)

Algemene Pensioen Groep (APG) ( email )

P.O. Box 75283
Amsterdam, 1070 AG
Netherlands

Tilburg University - Department of Economics

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Netspar

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tilburg University - Center for Economic Research (CentER) ( email )

Tilburg

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