A Global Perspective on Financial Regulation
Edited by John Evans, Michael Orszag and John Piggott
Chapter 8: Public Sector Pension Governance, Funding and Performance: A Longitudinal Appraisal
8. Public Sector Pension Governance, Funding and Performance: A Longitudinal Appraisal Tongxuan (Stella) Yang and Olivia S. Mitchell* Public pension plans are the mainstay of retirement security for millions of public sector employees around the world. In the United States, these plans have traditionally been of the defined benefit variety, holding around US$3 trillion in assets (Ilkiw 2003) and covering a range of state and local civil servants, teachers and university professors, and uniformed workers (firefighters, police). Although these pensions play a key role in US labour and capital markets, they are experiencing serious funding problems due to their assets standing well below the levels needed to cover the promised benefits. According to Bonafede, Foresti and Dashtara (2007), 80 per cent of the 64 state retirement systems that reported actuarial data for 2006 were underfunded, with the average underfunded plan having an assets-to-liabilities ratio equal to 79 per cent. Of the 108 state retirement systems that reported actuarial data for 2005, 84 per cent were underfunded, with the average underfunded plan having an assetsto-liabilities ratio equal to 82 per cent.1 A large number of stakeholders stand to lose if public pension funding ratios sink, including retirees, who may suffer benefit cuts, and taxpayers, who may have to pay for the underfinanced benefit claims.2 Such pension liabilities may also reduce the ability of governments to attract and retain high-quality employees,3 influence the credit ratings of pension plans and potentially increase the risk premiums for public debt.4 Traditionally, US public...
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