TY  - JOUR
AB  - Current public pension funding policy has arguably failed on both theoretical and empirical grounds. The traditional actuarial approach elides the risk-return tradeoff at the heart of finance economics and has resulted in steadily rising contribution rates, instead of a sustainable steady state. We propose an economic reformulation of funding policy based on steady-state analysis of the fundamental equations of motion for pension asset and liability growth, incorporating both an expected return on risky assets and a low-risk discount rate for liabilities. Our steady-state result simultaneously conveys the benefit of risky investment and the cost of the associated risk. We integrate our analysis into a simple social welfare function to re-examine the basis for pre-funding and elucidate the net benefits of using risky assets to defray contributions. We also formally derive a family of transition policies for convergence to the expected steady state. We illustrate how the parameters of our proposed policy can be adjusted to manage the tradeoff between long-run contribution rate risk and short-term responsiveness. We believe our analysis provides the basis for reformulating contribution policy in a way that better supports sustainability and coherently conveys the tradeoffs consistent with finance economics.
AU  - Costrell, Robert M. 
AU  - McGee, Josh B.
PY  - 2022
ST  - An Economic Reformulation of Public Pension Funding Policy
TI  - An Economic Reformulation of Public Pension Funding Policy
UR  - http://www.edworkingpapers.com/ai22-674
ER  -