M-RCBG Faculty Working Paper No. 2012-08

Underfunded Public Pensions in the United States: The Size of the Problem, the Obstacles to Reform and the Path Forward
Thomas J. Healey, Carl Hess, and Kevin Nicholson
April 2012

Across the United States, state and local government-sponsored pension plans are in trouble. They are dangerously underfunded to the extent that their assets are unable to meet future liabilities without either outsize investment returns or huge cash infusions. Over the past several years, estimates of the total size of the public pension problem in the U.S. have ranged from $730 billion in unfunded liabilities to $4.4 trillion. Many financial economists believe that the true size of the total unfunded liability lies closer to the larger estimates than it does to the smaller.

In this paper we attempt to explain the complex nature of pensions as a form of deferred compensation, to describe the size of the problem faced by public pension plan sponsors, and – most important – to offer a series of potential policy changes that can address the problem of public pension underfunding.

In order to accomplish these tasks in a comprehensive manner, we analyze and explain a series of recent efforts to size the magnitude of the public pension crisis in the U.S., and further examine the myriad financial, accounting, legal and political causes of the current predicament. We will also examine case studies of those states and local governments that have succeeded in the face of pension challenges and those that have not. Only through understanding the mix of dynamic issues that affect public pensions will we be able to generate practical solutions to this growing problem.

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