Should public retirement plans be fully funded?
By: Henning Bohn
Contributors: National Bureau of Economic Research
Series: NBER working paper series -- working paper 16409; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 16409.
Publisher: National Bureau of Economic Research
Published: 2010
Place of publication: Cambridge, MA
Language: eng
Format: [electronic resource] /
Description: "Most state and local retirement plans strive for full funding, at least by actuarial standards.  Funding measured at market values fluctuates and often falls short.  A common argument for full funding is that pensions are a form of deferred compensation that does not justify a debt.  The paper examines public finance, political economy, and financial market issues that bear on optimal funding, broadly and in a series of models.In a model where most taxpayers hold debt and face intermediation costs, returns on pension assets are less than taxpayers' cost of borrowing.  Pension funding is costly and hence zero funding is optimal.  The model also implies that unfunded pension promises are properly discounted at a rate strictly greater than the government's borrowing rate.  If pension funds serve as collateral, funding can be warranted despite the cost.  This is shown in a model with legal ambiguity and default risk.  Except in special cases, the optimal funding ratio is less than full funding"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 2/10/2011.

Includes bibliographical references.

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