TY  - JOUR
AU  - Bohn, Henning
TI  - Should Public Retirement Plans be Fully Funded?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 16409
PY  - 2010
Y2  - September 2010
DO  - 10.3386/w16409
UR  - http://www.nber.org/papers/w16409
L1  - http://www.nber.org/papers/w16409.pdf
N1  - Author contact info:
Henning Bohn
Department of Economics
University of California Santa Barbara
North Hall 2127
Santa Barbara, CA 93106
Tel: 805-893-4532
E-Mail: bohn@econ.ucsb.edu
M1  - published as Henning Bohn. "Should Public Retirement Plans be Fully Funded?," in Jeffrey R. Brown and Robert L. Clark, organizers, "The Economics of State and Local Pensions" Journal of Pension Economics and Finance, volume 10, issue 2, (Cambridge University Press) (2011)

M3  - presented at "State and Local Pensions Conference", August 19-20, 2010
AB  - Most state and local retirement plans strive for full funding, at least by actuarial standards. Funding measured at market values fluctuates and often falls short. A common argument for full funding is that pensions are a form of deferred compensation that does not justify a debt. The paper examines public finance, political economy, and financial market issues that bear on optimal funding, broadly and in a series of models.

In a model where most taxpayers hold debt and face intermediation costs, returns on pension assets are less than taxpayers' cost of borrowing. Pension funding is costly and hence zero funding is optimal. The model also implies that unfunded pension promises are properly discounted at a rate strictly greater than the government's borrowing rate. If pension funds serve as collateral, funding can be warranted despite the cost. This is shown in a model with legal ambiguity and default risk. Except in special cases, the optimal funding ratio is less than full funding.
ER  -