Document Type

Article

Publication Date

4-2012

Publication Source

Employment Research

Abstract

State public pension plans, mostly defined benefit plans, cover pension benefits for 12.8 million active public employees and 5.9 million retirees and other annuitants. However, by the end of 2009, public pension plans had accumulated a total funding deficit of $697 billion (measured by the difference between actuarial pension assets and liabilities). On average, public pension funds cover 75 percent of their liabilities, but individual state results vary greatly.

The 2008 stock market crash strongly affected pension asset value in that equity allocation on average accounted for 56 percent of invested assets. The average 2009 pension asset beta of 0.63 suggests that if the market fell 35 percent (the drop experienced during the 2008 financial crisis), public plans would lose 22 percent of their total fund value. Therefore, an important yet largely overlooked issue related to pension underfunding is the investment risk level assumed by public pension plans.

As shown in Figure 1, the state pension funds equity allocation varied greatly at the end of 2009, from 11 percent (South Carolina) to 69 percent (Nebraska and Mississippi). The current funding gap prompts the question of whether the pension fund managers will adopt riskier investment positions in hopes of raising returns and lowering the shortfall.

This article summarizes our research that is reported in our Upjohn Institute working paper (Mohan and Zhang 2012). In it, we examine the determinants of pension risk-taking policy during the period 2001–2009 after taking into consideration state government incentives, political pressure, fiscal constraints, public union presence, and workforce features.

Document Version

Published Version

Comments

This article is provided for download with the permission of the authors and the W.E. Upjohn Institute for Employment Research. Permission documentation is on file. A related paper, later published in the Journal of Banking and Finance, is available here.

For other articles on the subject, see the Employment Research website. The full issue of the newsletter in which this article appeared is available here.

Publisher

W.E. Upjohn Institute for Employment Research

Volume

19

Issue

2