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Public Pension Fund Update October 13, 2010

Posted by federalist in Finance, Pensions.

Andrew Biggs estimated a $3 trillion shortfall in funding of state pension funds.  The WSJ reports that a study from the Kellogg School of Management has put the municipal shortfall at $574 billion.

Most governments use the expected rate of return on a pension fund’s assets—typically around 8%—to discount liabilities. Critics say this accounting method say liabilities should be discounted based on much lower Treasury note yields.

The higher the discount rate, the smaller the liability. Thus, lowering the discount rate could mean governments would have to contribute more to pension funds—with the money coming from taxpayers or employees.

One of the study’s authors, Kellogg professor Joshua Rauh, said in an interview that current accounting rules encourage pension funds to take investment risks and “taxpayers are bearing the burden of that risk.”



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