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The most pressing budgetary challenge for governments in advanced economies is paying for rising benefit obligations tied to aging populations. Exposing the scale of the problem would seem to be in everyone's interest.
The post Do Pay-as-You-Go Entitlements Create Unfunded Liabilities? appeared first on American Enterprise Institute - AEI.

BA comprehensive look at the crisis of unfunded pension liabilities and what must be done to avoid the same problem in the future/b As the generational bubble of the Baby Boomers begins to retire, it is increasingly evident that governments, corporations, and individuals have failed to adequately prepare for the obligations and needs of this giant cohort. Retirees are outliving actuarial life expectancies, pension liabilities are skyrocketing, pension plans are underfunded, and medical costs rise, the United States alone can expect unfunded liabilities to exceed $4 trillion./ Even while the American economy shows signs of sustained recovery, states and local governments will still experience sharp increases in pension fund payments through the next year or longer. iGlobal Pension Crisis/i looks at this situation and offers practical advice for retirement plan managers and financial advisors, while also explaining how to strengthen pensions and prevent similar crises in the future./ ulliOffers a clear and comprehensive explanation of the current pension crisis for retirement fund managers, financial advisors, and economists/liliIncludes prescriptive guidance on how to strengthen the pension fund system and prevent another similar crisis/liliWritten by venture capitalist, entrepreneur, and former senior Wall Street executive Rich Marin/li/ul.

A growing body of research shows that economic, demographic, and institutional factors affect public pension funding. Most of these findings are based on the analysis of complete retirement systems, which are often funded by multiple plan sponsors. This article offers one of the first empirical analyses of the determinants of pension funding at the level of a city government that acts as a plan sponsor, often for more than one plan. Models predicting unfunded liabilities for a large national sample of cities over 2003–2012 suggest that city fiscal autonomy and reliance property taxes are additional pieces of the pension underfunding puzzle.

This paper applies a public choice approach to the problem of unfunded pension liabilities and adopts the methodology of Congleton and Shughart (1990) to model underfunding of state-level public pension plans using the median voter theorem, along with the theory of 'capture' by special interest groups, and a combined model of the two. With panel data from 2001 to 2009, the paper finds that the combined model provides the strongest explanation for the current levels of unfunded liabilities; hence, both median voter preferences and special interest group influence are affecting political outcomes. The special interest group model slightly outperforms the median voter model in direct comparisons. Adapted from the source document.

Existing empirical evidence at the country level exhibits a positive relationship between public indebtedness and the yield on the public debt. Using panel data over the period 2001 – 2014, we show that this relationship holds also for municipal bond yields and the indebtedness of U.S. states. Equally important, we find that municipal bond yields are positively related to implicit state debt, as captured by the financial situation of the states' civil servants pension funds, which are supposed to be guaranteed by the state government. In fact, the yield effect of an extra dollar of unfunded pension liabilities is of a similar magnitude as that of an extra dollar of explicit debt. The interest rate effects of higher explicit and higher implicit debt are mainly concentrated in the period since the start of the crisis.