There Is a Tangled Web of Factors Causing Inappropriate Pension Funding Behavior
![handle is hein.journals/jecoplcy14 and id is 111 raw text is:
2017]
THERE IS A TANGLED WEB OF FACTORS
CAUSING INAPPROPRIATE PENSION FUNDING
BEHAVIOR
Anthony Randazzo
I. UNDERFUNDED PUBLIC PENSIONS: THE WEB OF CAUSALITY
The Actuary Civil War of 2016 that broke out this past summer be-
tween the Society of Actuaries and American Academy of Actuaries is em-
blematic of the challenge facing public sector pension funds in America
today.' There is considerable consensus that public plans are grossly under-
funded. According to their own actuarial reports, the largest pension plans
run by the 50 states had a cumulative overfunded position in 2001 that col-
lapsed into roughly $1 trillion in unfunded liabilities by 2015.2 There is
profoundly less consensus on what factors have caused this underfunding to
emerge and whether actuarial valuations are accurately reflecting the true
health (or lack thereof) of American pension plans.3
Consider that at the heart of the Actuary Civil War is a disagreement
over discount rate policy. Historically, public sector pension funds have
used their assumed rate of return on assets to discount accrued liabilities.
This flies in the face of how financial economics understands risk, which
would suggest calculating the value of accrued pension liabilities should be
relative to the risk of liabilities, not the risk of the plan assets.' The debate
is important because if public plans were to use market based liability val-
ues, total unfunded liabilities for the biggest state plans combined would
likely be closer to $3 trillion or $5 trillion.'
1 Press Release, Am. Acad. of Actuaries, Future of the Joint Academy/SOA Pension Finance
Task Force (Aug. 1, 2016).
2 The author's own review and calculation of the pension plan valuations from all 50 states; plans
considered were any state plan or combination of state plans comprising at least 75% of the collective
liabilities of a state.
3 See e.g.
4 Aleksandar Andonov et al., Pension Fund Board Composition and Investment Performance:
Evidence from Private Equity, (Hoover Institution, Working Paper No. 16104, 2016),
https://papers.ssm.com/sol3/papes.cfm?abstractid=2754820; James Naughton et al., Public Pension
Accounting Rules and Economic Outcomes, 59 J. ACCT. & ECON. 2 (2015); JENNIFER STAMAN, CONG.
RESEARCH SERV., R41736, STATE AND LOCAL PENSION PLANS AND FISCAL DISTRESS: A LEGAL
OVERVIEW (2011); Robert Novy-Marx & Joshua Rauh, Public Pension Promises: How Big Are They
and What Are They Worth?, 66 J. FIN. 4 (2011); U.S. CONG. BUDGET OFF., THE UNDERFUNDING OF
STATE AND LOCAL PENSION PLANS (2011).
5 BOB WILLIAMS ET AL., UNACCOUNTABLE AND UNAFFORDABLE 2016: UNFUNDED PUBLIC
PENSION LIABILITIES NEAR $5.6 TRILLION, AM. LEGIS. EXCH. COUNCIL (2016),
107](ViewImageLocal?handle=hein.journals/jecoplcy14&div=9&collection=&method=preview&ext=.png&size=3)
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There Is a Tangled Web of Factors Causing Inappropriate Pension Funding Behavior
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