Public Pension Promises: How Big are They and What are They Worth?

Public Pension Promises: How Big are They and What are They Worth?

By
Robert Novy-Marx, Joshua D. Rauh
Journal of Finance. October
13, 2010, Vol. 66, Issue 4, Pages 1207-1245
  • Winner, 2011 Smith Breeden Prize, First Prize Paper for the best capital markets paper published in the Journal of Finance. State breakdown of $2.5 trillion unfunded public pension liability at the state level.

We calculate the present value of state employee pension liabilities using discount rates that reflect the risk of the payments from a taxpayer perspective. If benefits have the same default and recovery characteristics as state general obligation debt, the national total of promised liabilities based on current salary and service is $3.20 trillion. If pensions have higher priority than state debt, the value of liabilities is much larger. Using zero‐coupon Treasury yields, which are default‐free but contain other priced risks, promised liabilities are $4.43 trillion. Liabilities are even larger under broader concepts that account for salary growth and future service.