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Public Pension Promises: How Big Are They and What Are They Worth?




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    • Novy-Marx is at the Simon Graduate School of Business, University of Rochester, and NBER; Rauh is at the Kellogg School of Management, Northwestern University, and NBER. We thank Jeffrey Brown, Jeremy Gold, Deborah Lucas, Olivia Mitchell, Eduard Ponds, James Poterba, Steve Zeldes, and an anonymous referee for helpful discussions and comments. We also thank seminar participants at the National Tax Association Conference on Attaining Fiscal Sustainability (September 2008), the Wharton Department of Risk and Insurance, the Netspar Pension Workshop (January 2009), the MIT Bradley Public Economics seminar, the Society of Actuaries Public Pension Finance Symposium (May 2009), the June 2009 ICPM Discussion Forum, the Western Finance Association Meetings (San Diego, June 2009), and NYU Stern. We are grateful to Adam Friedlan and Jerry Chao for research assistance. We thank the Global Association of Risk Professionals (GARP) Risk Management Research Program, Netspar, the Chicago Booth Initiative on Global Markets (IGM), and the Zell Center for Risk Research at the Kellogg School of Management for financial support.


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.