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Toward An Economic Reformulation of Public Pension Funding Policy

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.
pension finance
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EdWorkingPaper suggested citation:

Costrell, Robert M., and Josh B. McGee. (). Toward An Economic Reformulation of Public Pension Funding Policy. (EdWorkingPaper: 22-674). Retrieved from Annenberg Institute at Brown University:

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