Toward An Economic Reformulation of Public Pension Funding Policy

August 2023

We propose an economic reformulation of contribution policy integrating: (1) formalization of sustainability as the steady-state contribution rate, incorporating both the expected return on risky assets and a low-risk discount rate for liabilities; (2) derivation of contribution adjustment policies required for convergence toward the target funded ratio and contribution rate; and (3) a stylized optimization framework for simultaneous determination of the target portfolio return and funded ratio. This analysis provides new theoretical insights into the basis for pre-funding vs. pay-as-you-go, resting on the convexity of the long-run risk-return relationship, and also potentially practical guidelines for contribution policy.

Keywords

pension finance

Education level

K-12 Education

Topics

Staffing, Finance, and Operations