Explore the vast range of titles available.

In the wake of the financial crisis and Great Recession, the health of state and local pension plans has emerged as a front burner policy issue. Elected officials, academic experts, and the media alike have pointed to funding shortfalls with alarm, expressing concern that pension promises are unsustainable or will squeeze out other pressing government priorities. A few local governments have even filed for bankruptcy, with pensions cited as a major cause. Alicia H. Munnell draws on both her practical experience and her research to provide a broad perspective on the challenge of state and local pensions. She shows that the story is big and complicated and cannot be viewed through a narrow prism such as accounting methods or the role of unions. By examining the diversity of the public plan universe, Munnell debunks the notion that all plans are in trouble. In fact, she finds that while a few plans are basket cases, many are functioning reasonably well. Munnell's analysis concludes that the plans in serious trouble need a major overhaul. But even the relatively healthy plans face three challenges ahead: an excessive concentration of plan assets in equities; the risk that steep benefit cuts for new hires will harm workforce quality; and the constraints plans face in adjusting future benefits for current employees. Here, Munnell proposes solutions that preserve the main strengths of state and local pensions while promoting needed reforms.

This paper analyzes various reform options for Japan's public pension in light of large fiscal consolidation needs of the country. The most attractive option is to increase the pension eligibility age in line with high and rising life expectancy. This would have a positive effect on long-run economic growth and would be relatively fair in sharing the burden of fiscal adjustment between younger and older generations. Other attractive options include better targeting by \"clawing back\" a small portion of pension benefits from wealthy retirees, reducing preferential tax treatment of pension benefit incomes, and collecting contributions from dependent spouses of employees, who are currently eligible for pension benefits even though they make no contributions. These options, if implemented concurrently, could reduce the government annual subsidy and the government deficit by up to 1¼ percent of GDP by 2020.

People covered by public pensions are often the subject of ‘pension envy’, that is, their benefits might seem more generous and their contributions lower than those offered by the private sector. Yet this book points out that such judgments are often inaccurate, since civil servants hold jobs with few counterparts in private industry, such as firefighters, police, judges, and teachers. Often these are riskier, dirtier, and demand more loyalty and discretion than would be required of a more mobile labour force in the private sector. The debate challenges traditional ideas about how the public employee labour contract is structured and raises questions about how such employees are attracted to the public sector, retained and motivated on the job, and retired, via an entire compensation package of wages and benefits. This book explores aspects of these schemes, addressing the cost and valuation debate, along with the political economy of how public pension asset pools are perceived and managed. The discussion also explores ways that public pensions can be strengthened in the US, Japan, Canada, and Germany.

Measuring the extent to which a firm is financially constrained is critical in assessing capital structure. Extant measures of financial constraints focus on macro firm characteristics such as age and size, variables highly correlated with other firm attributes. We parse 10-K disclosures filed with the U.S. Securities and Exchange Commission (SEC) using a unique lexicon based on constraining words. We find that the frequency of constraining words exhibits very low correlation with traditional measures of financial constraints and predicts subsequent liquidity events, such as dividend omissions or increases, equity recycling, and underfunded pensions, better than widely used financial constraint indexes.

We calculate the present value of state employee pension liabilities using discount rates that reflect the risk of the payments from a taxpayer perspective. If benefits have the same default and recovery characteristics as state general obligation debt, the national total of promised liabilities based on current salary and service is $3.20 trillion. If pensions have higher priority than state debt, the value of liabilities is much larger. Using zero-coupon Treasury yields, which are default-free but contain other priced risks, promised liabilities are $4.43 trillion. Liabilities are even larger under broader concepts that account for salary growth and future service.

As of December 2008, state governments had approximately$1.94 trillion set aside in pension funds for their employees. How does the value of these assets compare to the present value of states' pension liabilities? Just as future Social Security and Medicare liabilities do not appear in the headline numbers of the U.S. federal debt, the financial liability from underfunded public pensions does not appear in the headline numbers of state debt. If pensions are underfunded, then the gap between pension assets and liabilities is off-balance-sheet government debt. We show that government accounting standards require states to use procedures that severely understate their liabilities. We then discuss the true economic funding of state public pension plans. Using market-based discount rates that reflect the risk profile of the pension liabilities, we calculate that the present value of the already-promised pension liabilities of the 50 U.S. states amount to $ 5.17 trillion, assuming that states cannot default on pension benefits that workers have already earned. Net of the$1.94 trillion in assets, these pensions are underfunded by $ 3.23 trillion. This “pension debt” dwarfs the states' publicly traded debt of $0.94 trillion. And we show that even before the market collapse of 2008, the system was economically severely underfunded, though public actuarial reports presented the plans' funding status in a more favorable light.

This study isolates the causal effects of financial literacy and schooling on wealth accumulation using a new household dataset and an instrumental variables (IV) approach. Financial literacy and schooling attainment are both strongly positively associated with wealth outcomes in linear regression models, whereas the IV estimates reveal even more potent effects of financial literacy. They also indicate that the schooling effect only becomes positive when interacted with financial literacy. Estimated impacts are substantial enough to imply that investments in financial literacy could have large wealth payoffs.

Nearly all state and local pension defined benefit pensions plans compute the present value of their future liabilities using the expected return on the assets held in the pension trust. This practice contrasts sharply with finance theory, which is unambiguous that the appropriate discount rate is one that reflects the riskiness of the liabilities, not the assets. This paper notes that the strong constitutional and other legal benefit protections make many defined benefit pension obligations virtually risk free. Were governments to discount liabilities in this way, it would reveal that state and local pensions are more underfunded than is generally reported.

The impact of good governance on investment management and performance is immense. Several key factors contribute to good governance within pension funds, appropriate governance structures; well-defined accountabilities, policies, and procedures; and suitable processes for the selection and operation of governing bodies and managing institutions. Not surprisingly, good governance requires leadership by individuals with the expertise, professionalism, and integrity to navigate a fund's direction and withstand pressures from multiple constituencies. In the current context of aging populations in many countries, fiscal burdens on pension funds are increasing. At the same time, the necessity of delivering on pension commitments in contributory schemes means that governance, transparency, and accountability should be of utmost importance to pension fund managers. With these concerns in mind, part three of this book provides useful perspectives from senior managers of public pension funds, international pension authorities, and multilateral institution representatives on the structures, policies, and processes that aim to support good governance. Principally reflecting on the characteristics that have been conducive to good governance, including reform measures undertaken, they also consider policy and investment management measures taken to effectively manage fiscal risks, including those that emerged from the financial crisis.

Behavioral economics can be scaled up to have a major, positive impact on certain behaviors, such as retirement savings. Many countries are facing a retirement savings crisis. In the United States, for example, the fraction of workers at risk of having inadequate funds to maintain their lifestyle through retirement is estimated to have increased from 31% to 53% from 1983 to 2010 ( 1 ). Roughly half of U.S. employees (78 million) have no access to retirement plans at their workplace ( 2 ). Fortunately, there are solutions to these problems. We simply have to change the choice architecture of retirement plans by utilizing the findings of behavioral economics research ( 3 ) and make such plans available to all workers. We describe a large-scale field demonstration of the potential impact of such research-based changes in how we save.