The State Worker

Chronicling civil-service life for California state workers

June 23, 2011
Study projects pensions will cost $1,398 per household annually

Well, here's another one.

A new study from the Kellogg School of Management at Northwestern University and the Simon School of Business predicts that American households will have to contribute an average of $1,398 per year to fulfill public pension promises.

Click here for "The Revenue Demands of Public Employee Pension Promises," co-authored by Joshua Rauh of the Kellogg School and Robert Novy-Marx of the University of Rochester. Rauh and Novy-Marx calculate the increases in state and local pension contributions that would be required to achieve full funding of state and local pension systems in the U.S. over the next 30 years.

The study also looks at what would happen if newly-hired employees were put into defined contribution plans and concluded the shift would reduce the per-household annual contribution to $1,223, or by about $175. In states with large numbers of workers outside the Social Security system, the savings is limited by the likelihood that those governments would have to start paying into Social Security and bearing most of the costs themselves.

The study's authors also looked at what would happen if new and existing workers were shifted into DC accounts. Under that controversial option, no earned benefits including cost-of-living adjustments are revoked, but defined benefit pensions stop growing with service and salary. Future contributions are placed into DC accounts. The DB-to-DC switch has been common in the private sector for decades, but would face an uphill legal battle if implemented in the public sector.

An across-the-board pension plan shift for new and current workers would reduce the average household contribution to about $800, Rauh and Novy-Marx figure, but even freezing all benefits at today's levels won't fix the unfunded liabilities that still need to be paid off.

Rauh and Novey-Marx have written plenty about pensions. (Here's another example of their work.) The New York Times briefly referenced the study in a pension story that ran earlier this week.

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About The State Worker

Jon Ortiz The Author

Jon Ortiz launched The State Worker blog and a companion column in 2008 to cover state government from the perspective of California government employees. Every day he filters the news through a single question: "What does this mean for state workers?" Join Ortiz for updates and debate on state pay, benefits, pensions, contracts and jobs. Contact him at (916) 321-1043 and at jortiz@sacbee.com.

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