Reforming American Public-Sector Pension Plans: Truths and Consequences

10 Pages Posted: 19 Sep 2014

See all articles by Roel M. W. J. Beetsma

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

Zina Lekniute

University of Amsterdam

Eduard H.M. Ponds

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

Date Written: September 17, 2014

Abstract

Most public-sector pension plans in the United States provide quite generous defined benefits. Long-term projections show that full payment of these promises threatens the finances of many state and local employers, which implies that taxes will have to be increased or pensions and/or other public expenditures reduced. This article analyzes the effectiveness of measures aimed at improving the sustainability of these plans. We consider the impact of contribution increases, benefit reductions, and adjustments in the pension fund’s investment strategy. Since a pension fund can be seen as a zero-sum game, these interventions imply value redistributions among current and future plan participants and current and future tax payers. We use the value-based asset-liability management (ALM) method to estimate the value of those transfers. These imply massive value redistributions from taxpayers to plan participants that could exceed 20% of American GDP. Hence, plan sustainability may be achieved only through either substantially higher contributions or lower benefits.

Keywords: Amortization Period, Conditional Indexation, Funding Ratio, GASB Standards, Pension Fund, Value-Based ALM

Suggested Citation

Beetsma, Roel M. W. J. and Lekniute, Zina and Ponds, Eduard H.M., Reforming American Public-Sector Pension Plans: Truths and Consequences (September 17, 2014). Rotman International Journal of Pension Management, Vol. 7, No. 2, 2014, Available at SSRN: https://ssrn.com/abstract=2497525 or http://dx.doi.org/10.2139/ssrn.2497525

Roel M. W. J. Beetsma (Contact Author)

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

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Zina Lekniute

University of Amsterdam ( email )

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Eduard H.M. Ponds

Algemene Pensioen Groep (APG) ( email )

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Tilburg University - Department of Economics

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Netspar

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Tilburg, 5000 LE
Netherlands

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

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