Article ID: | iaor201112081 |
Volume: | 66 |
Issue: | 4 |
Start Page Number: | 1211 |
End Page Number: | 1249 |
Publication Date: | Aug 2011 |
Journal: | The Journal of Finance |
Authors: | Novy-Marx Robert, Rauh Joshua |
Keywords: | pensions |
We calculate the present value of state employee pension liabilities using discount rates that reflect the risk of the payments from a taxpayer perspective. If benefits have the same default and recovery characteristics as state general obligation debt, the national total of promised liabilities based on current salary and service is $3.20 trillion. If pensions have higher priority than state debt, the value of liabilities is much larger. Using zero-coupon Treasury yields, which are default-free but contain other priced risks, promised liabilities are $4.43 trillion. Liabilities are even larger under broader concepts that account for salary growth and future service.