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

36 Pages Posted: 7 Mar 2015

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: March 14, 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 alternative 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 benefits of the contract to the various stakeholders. All participant cohorts under our simulation horizon derive a substantial net benefit from the pension contract, implying that tax payers make substantial contributions to this pension arrangement. The aforementioned measures can be instrumental in alleviating the burden on the tax payer, though this will happen at the cost of a reduction in the value of the contract to the participants.

JEL Classification: -

Suggested Citation

Lekniute, Zina and Beetsma, Roel M. W. J. and Ponds, Eduard H.M., A Value-Based Approach to Pension Redesign in the US State Plans (March 14, 2014). Netspar Discussion Paper No. 03/2014-080, Available at SSRN: https://ssrn.com/abstract=2574286 or http://dx.doi.org/10.2139/ssrn.2574286

Zina Lekniute (Contact Author)

University of Amsterdam ( email )

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Roel M. W. J. Beetsma

University of Amsterdam - Research Institute in Economics & Econometrics (RESAM) ( 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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Tilburg University - Center for Economic Research (CentER) ( email )

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