THE 80% PENSION FUNDING TARGET, HIGH ASSUMED RETURNS, AND GENERATIONAL INEQUITY

Generational inequity in pension funding is highly sensitive to the lax policies of 80% funding targets and high assumed returns to investment. I develop a simple, powerful relationship between steady-state (SS) inequity in contributions--the percent of extra contributions to fund prior cohorts--and the SS unfunded ratio. I then show how the SS unfunded ratio is governed by x% funding targets and the gap between assumed and true returns. The SS degree of inequity is over 60% under an 80% funding target and over 50% with a one-point gap between assumed and true returns. (JEL H75)
I. INTRODUCTION Employer costs for state and local pensions have doubled as a percent of payroll in the last decade, from 7.7% in 2004 to 15.4% in 2015.' The rise [...]