Public pension advocates often argue that pension costs account for only a small part of state and local spending. According to a recent report by the National Association of State Retirement Administrators, state and local governments spent only 4.1% their budgets on pension contributions in 2013. Andrew Biggs in this article shows why the 4.1 percent figure is misleading.
According to Biggs, public pensions understate their costs by adopting highly lenient funding rules compared to corporate pensions and public pensions in other countries. While public pensions are allowed to discount their liabilities at a high rate reflecting expected returns on assets, corporate plans must use a lower discount rate based on a low-risk corporate bond yield. Corporate plans must also amortize their unfunded liabilities much more quickly than public plans. Biggs finds that if public plans adopted the corporate rules, pension contribution would rise from 24 percent of payroll to 105 percent, and from 4.1 percent of government budgets to 20.4 percent.
Read the full article here.
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