Journal of Pension Economics and Finance

Articles

The economics of state and local pensions

JEFFREY R. BROWNa1, ROBERT CLARKa2 and JOSHUA RAUHa3

a1 University of Illinois at Urbana-Champaign, 515 East Gregory Drive, Champaign, IL 61820, and NBER (e-mail: brownjr@illinois.edu)

a2 Poole College of Management, North Carolina State University, Box 7229, Raleigh, NC 27695 (e-mail: robert_clark@ncsu.edu)

a3 Kellogg School of Management, Northwestern University, 2001 Sheridan Road, Evanston, IL 60208, and NBER (e-mail: joshua-rauh@kellogg.northwestern.edu)

Abstract

This paper provides an overview of an economics-based perspective on the financial aspects of state and local public pensions in the U.S. Drawing on the research commissioned for an NBER research program on this topic, we discuss the large degree to which public pension liabilities exceed the assets set aside to fund them. We summarize issues related to the optimality of pre-funding, portfolio allocation, the discounting of liabilities, as well as how plans operate in practice. We also lay out an agenda for future research related to financial aspects of public pensions, retiree health plans for public employees, as well as issues related to plan design and labor market outcomes.