Document Type
Response or Comment
Publication Date
2-1-2012
Publication Source
Upjohn Institute Policy Papers
Abstract
Public pension funds that cover retirement benefits for almost 20 million active or retired employees have been significantly underfunded. An important, though largely overlooked, issue related to pension underfunding is the excessive investment risk levels assumed by public plans. Our analysis suggests government accounting standards strongly affect public fund investment risk, as higher return assumptions (used to discount pension liabilities) are associated with higher investment risk.
Public funds undertake more risk if they are underfunded and have lower investment returns in previous years, consistent with the risk transfer hypothesis. Furthermore, pension funds in states facing fiscal constraints allocate more assets to equity and have higher betas. There also appears to be a herding effect in that a change in CalPERS portfolio beta or equity allocation is mimicked by other pension funds.
Solutions to excessive investment risk include use of more realistic discount rates such as a Treasury rate or a municipal bond yield to estimate liabilities and regulations or practices that reduce the ability of a plan to shift an underfunding burden to future generations.
Document Version
Published Version
Copyright
Copyright © 2012 by the Authors and the W.E. Upjohn Institute for Employment Research
Publisher
W.E. Upjohn Institute for Employment Research
Keywords
Labor market issues, retirement, pension
Sponsoring Agency
W.E. Upjohn Institute
eCommons Citation
Mohan, Nancy and Zhang, Ting, "Upjohn Institute Policy Paper: Public Pension Crisis and Investment Risk Taking: Underfunding, Fiscal Constraints, Public Accounting, and Policy Implications" (2012). Economics and Finance Faculty Publications. 67.
https://ecommons.udayton.edu/eco_fac_pub/67
Included in
Benefits and Compensation Commons, Business Administration, Management, and Operations Commons, Economic History Commons, Economic Theory Commons, Finance Commons, Finance and Financial Management Commons
Comments
The document available for download, Policy Paper No. 2012-013, is provided with the permission of the authors and the W.E. Upjohn Institute for Employment Research. Permission documentation is on file.
Research was funded by the W.E. Upjohn Institute for Employment Research, Grant No. 11-130.
Related paper: "An Analysis of Risk-Taking Behavior for Public Defined Benefit Pension Plans."
View other policy papers in the collection here.