# Presentation: 242597

## Projecting State & Local Government Retirement Costsversion 3BEA Government Statistics Users ConferenceSeptember 14, 2006

- Richard Krashevski, GAO
- and
- Jeremy Schwartz, GAO and GWU
- The authors are solely responsible for this presentation and the estimates should not be attributed to the U.S. Government Accountability Office.

## Purpose of the Projections:

- Part of GAO effort to assess fiscal outlook of federal, state and local governments
- Since 1992 GAO has published long-term fiscal simulations of federal deficits & debt
- Recent effort to include state & local sector in long-term fiscal outlook analysis
- Pension costs are a key part of this effort

## Steps used to find the government’s required pension contribution: 

- Steps:
- Project employment
- Project wages
- Project the growth in the number of beneficiaries
- Project the growth in real benefits per beneficiary
- Project employee contributions as a constant % of future wages
- Determine the government’s contribution rate as the the PV of future liabilities minus the sum of the PV of employee contributions and 2005 assets, all divided by the PV of future wages

## Pension Model Variables

*eglsall*: state and local employees (NIPA).  Grows with population (*np*)
*np*: U.S. Population.  Grows at OASDI Trustees’ assumed rates = declining gradually from 0.8%/yr to a steady 0.3%/yr beginning in 2043.
*jecistlcr*: real employment cost index for state and local government employees (BLS).  Growth equals difference between CBO *eci* and *cpiu *growth assumptions (3.3% - 2.2% = 1.1%)
*cpiu*: consumer price index (BLS).  Grows at CBO’s assumed rate = 2.2%.
*gslcwageallr*: aggregate real wages paid to state and local workers (NIPA).  Grows with real employment cost index (*jecistlcr*) and population (*np*).
*beneficiaries*: state and local pension benefit recipients (Census).  Growth determined by lagged employment growth.
*deathrate*: assumed percentage of retirees that are deceased in the current year.  Based on SSA terminated beneficiaries = 3.67% of beneficiaries.
*penbenr*: real aggregate pension payments made to state and local pension beneficiaries (NIPA). Depends on projected beneficiaries and real benefit per beneficiary.
*eeconpenr*: real aggregate pension contributions by state and local employees (NIPA) = 4.7% of wages & salaries.
*rpenreal*: real return on pension assets (GAO Analysis).  Average real return on Flow of Funds retirement fund asset categories from 1965-2005 times their average share of assets over the last ten years = 5.0%.
*contributionrate*: state and local government pension contributions as a percentage of state and local aggregate wages (GAO Analysis).

## Pension Model Equations

**Notes:**
Actual Beneficiary Equation(EGSLALL has been smoothed): Dlog(Beneficiaries)=0.0000008*DLOG(EGSLALL_HP(-44))+0.0000009*DLOG(EGSLALL_HP(-40))+0.5240834*DLOG(EGSLALL_HP(-34))+0.0414877*DLOG(EGSLALL_HP(-25))+0.0436260*DLOG(EGSLALL_HP(-24))+0.0195558*DLOG(EGSLALL_HP(-23))+0.0486757*DLOG(EGSLALL_HP(-22))+0.3225686*DLOG(EGSLALL_HP(-21))+0.0000003*DLOG(EGSLALL_HP(-7))+0.0000009*DLOG(EGSLALL_HP

## Lagged Employment Growth Weights Determine Beneficiary Growth

**Notes:**
Document Number: 1686568

Determined Weights
-34		-25		-24		-23		-22		-21	
52.4%	4.1%		4.4%		2.0%		4.9%		32.3%	

Data is available annually back to 1981 excluding 1990 and 1991.  To look at percentage changes we need data for one additional year.  As a result we start at 1993.  
Data is also available on a five year basis back to 1957.

## Forecast and Actual State and Local and Social Security Retirees

**Notes:**
Document Number: 1686568

2004 State and Local Actuals: 6.70 million
2004 SSA Actuals: 47.37 million
2080 State and Local Forecast: 13.55 million (fitted value)
2080 State and Local Forecast: 13.19 million (using initializing from 2004 Actuals)
2080 SSA Forecast: 111.23 million

## Composition of Pension Fund Assets: Shift to Equities

**Notes:**
Source Document: 1510961			
Composition of Pension Fund Assets								
Based on FoF119Pension Tab								

Year	Treasuries	Corporates	GSEs	Mortgages	Municipals	Fixed Income	Equities	
1952	50.8%	15.2%		0.3%	2.1%		28.3%	96.8%		0.8%	
1960	28.9%	36.1%		1.0%	7.3%		22.3%	95.7%		3.0%	
1970	8.5%		58.1%		2.5%	9.8%		3.4%		82.3%		16.7%	
1980	10.7%	47.1%		9.7%	5.6%		2.1%		75.2%		22.6%	
1990	23.1%	19.5%		8.6%	2.2%		0.1%		53.4%		39.0%	
2000	7.8%		13.7%		7.8%	1.0%		0.1%		30.4%		56.6%	
2005	4.4%		7.4%			10.9%0.7%		0.1%		23.4%		64.4%	

## Historic Contribution Rate and Return on Pension Assets

- Real return averages -0.3% from 1977 - 1980.  The contribution rate rises from 10.5% to 11.7% from 1978 to 1983.

- Real return averages 16.4% from 1996 - 1999.  The contribution rate falls from 8.9% to 6.3% from 1997 to 2001.

**Notes:**
Document Number: 1663916
Average Contribution Rate from 1948 to 2005 is 8.1%.  Standard Deviation is 1.96%.

## Contribution Rate: Sensitivity to Real Return on Assets

**Notes:**
Document Number: 1663916

## Contribution Rate: Sensitivity to Pension Assets (1%)

**Notes:**
Document Number: 1663916

Starting Assets in Baseline: 2,691.5
Sensitivity to 1 % Increase to 2,718.4, an increase of 26.9.
Sensitivity to 1 % Decrease to 2,664.6 a decrease of 26.9.

## Contribution Rate: Sensitivity to Pension Assets (1 standard dev.)

**Notes:**
Document Number: 1663916

Starting Assets in the Baseline: 2,691.50 for 2005
Starting Asses in the Baseline:  2,572.03 for 2004
The Growth in Assets from 2004 is based on growing the assets by the real rate of return of 2005 plus (minus) the standard deviation of the real rate of return and adding the government and employee contributions for the period and subtracting aggregate pension payments.
The real rate of return in 2005 is 3.882%
The standard deviation is 6.637% over the 1965 – 2005 period (the average rate 4.513%).

The Sensitivity for an increase of one standard deviation is: 3.882%+6.637%=10.5%  and the resulting value of 2005 assets is:
2,879.27 an increase of 187.77 or 6.521% from the 2005 baseline value.
The Sensitivity for an increase of one standard deviation is: 3.882%-6.637%=-2.755% and the resulting value of the 2005 assets is: 2,509.41 a decrease 182.09 or -6.765% from the 2005 baseline value. 

## Contribution Rate: Ten Year Delay to Adjustment

**Notes:**
Document Number: 1663916