How Public Pension Plans Can (and Why They Shouldn’t) Ignore Financial Economics

Abstract

Public pension plan sponsors claim that their perpetual existence and taxing power exempt them from financial economics. They therefore ignore current market conditions and rely on patience and intergenerational risk sharing to overcome risk. The author shows that their use of discount rates that far exceed current market levels produces financial opacity, retirement insecurity, and intergenerational inequity, leaving the solvency of these plans dependent on the systematic mistreatment of future generations of taxpayers.