The Revenue Demands of Public Employee Pension Promises

The Revenue Demands of Public Employee Pension Promises

By
Robert Novy-Marx, Joshua D. Rauh
American Economic Journal: Economic Policy. February
2014, Vol. 6, Issue 1, Pages 193-229

We calculate increases in contributions required to achieve full funding of state and local pension systems in the United States over 30 years. Without policy changes, contributions would have to increase by 2.5 times, reaching 14.1 percent of the total own revenue generated by state and local governments. This represents a tax increase of $1,385 per household per year, around half of which would go to pay down legacy liabilities while half would fund the cost of new promises. We examine sensitivity to asset return assumptions, wage correlations, the treatment of workers not currently in Social Security, and endogenous geographical shifts in the tax base.