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The 80% Pension Funding Target, High Assumed Returns, And Generational Inequity

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  • Robert M. Costrell

Abstract

Generational inequity in pension funding is highly sensitive to the lax policies of 80% funding targets and high assumed returns to investment. I develop a simple, powerful relationship between steady‐state (SS) inequity in contributions—the percent of extra contributions to fund prior cohorts—and the SS unfunded ratio. I then show how the SS unfunded ratio is governed by x% funding targets and the gap between assumed and true returns. The SS degree of inequity is over 60% under an 80% funding target and over 50% with a one‐point gap between assumed and true returns. (JEL H75)

Suggested Citation

  • Robert M. Costrell, 2018. "The 80% Pension Funding Target, High Assumed Returns, And Generational Inequity," Contemporary Economic Policy, Western Economic Association International, vol. 36(3), pages 493-504, July.
  • Handle: RePEc:bla:coecpo:v:36:y:2018:i:3:p:493-504
    DOI: 10.1111/coep.12200
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    References listed on IDEAS

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    1. Jeffrey R. Brown & David W. Wilcox, 2009. "Discounting State and Local Pension Liabilities," American Economic Review, American Economic Association, vol. 99(2), pages 538-542, May.
    2. N. Gregory Mankiw, 2015. "Yes, r > g. So What?," American Economic Review, American Economic Association, vol. 105(5), pages 43-47, May.
    3. Robert Novy-Marx & Joshua D. Rauh, 2009. "The Liabilities and Risks of State-Sponsored Pension Plans," Journal of Economic Perspectives, American Economic Association, vol. 23(4), pages 191-210, Fall.
    4. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66(6), pages 467-467.
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    Cited by:

    1. Robert M. Costrell & Josh McGee, 2019. "Cross-Subsidization of Teacher Pension Costs: The Case of California," Education Finance and Policy, MIT Press, vol. 14(2), pages 327-354, Spring.

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    More about this item

    JEL classification:

    • H75 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Government: Health, Education, and Welfare

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