Wednesday, June 22, 2011

New Paper: "The Revenue Demands of Public Employee Pension Promises*"

This appears to be a non-partisan nuts and bolts paper for the National Bureau of Economic Research.
If anyone can figure out a way to do a clawback on the politicians who cut these deals I would love to hear it.

June 2011
We calculate the increases in state and local revenues required to achieve full funding of state and local pension systems in the U.S. over the next 30 years. Without policy changes, contributions to these systems would have to immediately increase by a factor of 2.5, reaching 14.2% of the total own-revenue generated by state and local governments (taxes, fees and charges). 

This represents a tax increase of $1,398 per U.S. household per year, above and beyond revenue generated by expected economic growth. In thirteen states the necessary increases are more than $1,500 per household per year, and in five states they are more than $2,000 per household per year. Shifting all new employees onto defined contribution plans and Social Security still leaves required increases at an average of $1,223 per household. Even with a hard freeze of all benefits at today’s levels, contributions still have to rise by more than $800 per U.S. household to achieve full funding in 30 years. Accounting for endogenous shifts in the tax base in response to tax increases or spending cuts increases the dispersion in required incremental contributions among states.

Novy-Marx: (585) 275-3914, Rauh: (847) 491-4462, Rauh gratefully acknowledges funding from the Zell Center for Risk Research at the Kellogg School of Management. We thank David Wilcox for discussion, as well as seminar participants at the Wharton Household Finance Conference, the Harvard University Public Finance Seminar, HEC Paris, and the University of Lugano for helpful comments and suggestions.
Paper (52 page PDF)