Legacy Debt in Public Pensions: A New Approach

This brief – the second of two – takes a historical view of public pension underfunding to motivate a more transparent funding policy going forward. It builds on a key finding from the first brief – that some pension funds are still burdened by unfunded liabilities accumulated before modern actuarial funding.1 This so-called “legacy debt†poses a different policy challenge than other sources of unfunded liability because it reflects the cost from an older way of managing promised retirement benefits. And, because it stems from a much earlier era, it does not fit well within the modern framework that is designed to allocate costs to the period when benefits were earned Given the challenges that legacy debt poses, this brief presents a new approach that separates the funding of legacy liabilities from other pension liabilities, while valuing liabilities in a manner more consistent with modern accounting and finance. Hopefully, the new approach provides a clearer way forward for government employers, employees, and taxpayers.