On public pensions

First, public sector pension plans are more generous than comparable plans in the private sector. They tend to pay higher benefits per year of service and encourage younger retirement ages. Because of these plan characteristics, these plans cost more than private sector pension plans. Second, many governmental units have not provided sufficient annual contributions to their pension funds and as a result, their plans are underfunded and in some cases dramatically so. The economic downturn and decline in equity values has exacerbated the poor funding of these plans. Third, compared to reported liabilities, public sector plans are even more poorly funded than official estimates indicated due to the use of discount rates that are much higher than the rate that should be used to value accrued liabilities.

Fourth, public pension fund managers do not appear to invest in a manner consistent with asset‐liability matching. The portfolios of public pension systems bear some resemblance to those of university endowments and foundations, despite the fact that public pensions have even less ability to scale back spending if risky assets underperform expectations. […]

[T]he cost of retiree health plans is soaring and, in most states, and these plans are completely pay‐as‐you‐go. The variation in the cost of health plans across the states is much greater than the variation in pension plans. Similar to private employers, employers in the public sector are struggling with the cost of these plans and are implementing an assortment of policy changes in an attempt to slow the growth rate of their costs.

That’s from the conclusion of a new NBER working paper, The Economics of State and Local Pensions, by Jeffrey R. Brown, Robert Clark, and Joshua Rauh.

UPDATE: I changed the title.

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