August 31, 2010

State of the State Pensions

States underestimate public sector pension liabilities
Key materials
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Mouse over states to see unfunded pension liabilities per capita; total unfunded pension liabilities are displayed in parentheses.

Public sector pension plans underestimate the true size of their unfunded liabilities. When applying financial economic theory to state projections, total liabilities of state plans equal $5.2 trillion, producing an unfunded liability of $3 trillion, which is $2.5 trillion more than states are reporting. This method values pension liabilities using the risk-free rate of return that the Treasury uses instead of the overly optimistic eight percent rate of return used by the states. Check out the difference in the projections above. The first map shows states’ unfunded pension liabilities as they report them. The second map shows the size of unfunded liabilities when applying the risk-free rate of return.

State actuaries underestimate how much they owe on public employee pension plans. When properly projecting state pension plans, total liabilities equal $5.2 trillion, $3.0 trillion of which is unfunded.  This unfunded portion is $2.5 trillion greater than the states report.

The first map shows states’ unfunded pension liabilities as states report them. The second map shows the size of unfunded liabilities when using standard financial practice to calculate them.

For more information, see "The Crisis in Public Sector Pension Plans," by Eileen Norcross.

Source: Novy-Marx, Robert, and Joshua D. Rauh. 2009. "The Liabilities and Risks of State-Sponsored Pension Plans." Journal of Economic Perspectives, 23(4): 191–210.

Data is for 2008.  All figures in 2008 dollars

Eileen Norcross is a senior research fellow with the Social Change Project and the lead researcher on the State and Local Policy Project. Tate Watkins, a research associate with the State and Local Policy and Technology Policy programs, contributed to this project.