Public Pension Shortfall is Worse than You Think

A new research paper, “Public Pension Promises: How Big are They and What are They Worth?,” from the University of Chicago looks at nationwide public pension obligations and funding. The author’s summarize the paper as:

We calculate two present value measures of already-promised state pension liabilities using discount rates that reflect their risk. If benefits have the same priority in default as general obligation debt, aggregate underfunding is $1.21 trillion. If states cannot default on these benefits, underfunding is $3.12 trillion. The first measure is a lower bound on the value of the liability to taxpayers, and is more than the $0.94 trillion in state municipal debt. The second measure is a better benchmark for funding adequacy. We also estimate broader concepts of accrued liabilities that account for projected salary growth and future service.

You can download the paper here.

From their conclusion

[O]ur calculations focus only on liabilities accrued until now. Our summary numbers therefore assume that states will fully fund new liabilities accrued in the future, both from current and future workers. Munnell et al (2008) report that 57% of state and local governments paid their full Annual Required Contributions (ARCs) in 2006, with 16% contributing 80-99%, 13% contributing 60-79%, and 14% even less than 60%. Mitchell and Smith (1994) find wide variations in this funding behavior. Since there is no material penalty for not funding newly accrued benefits (i.e. for violating the ARCs implied in the funding standards), states do not always comply with funding to their own standards.


as shown by Lucas and Zeldes (2009), if taxation to correct pension underfunding has nonlinear distortionary costs, investing underfunded public pensions in risky assets with high expected returns and high volatility may impose a large expected cost of distortionary taxation on future generations.

The bottom line of this paper is that:

a) By the most realistic measure, public pensions in America are underfunded by more than $10 trillion.

b) Future taxes to pay for the benefits promised but not funded by current political leaders will be very burdensome and will distort the economy.

Future generations will curse us for this.