projecting state and local government retirement costs by richard krashevski, gao jeremy schwartz,...
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Projecting State and Local Government Retirement CostsBy Richard Krashevski, GAO Jeremy Schwartz, GAO and GWU
Comments byBruce Baker
Chief State and Local Government BranchBureau of Economic Analysis
2www.bea.gov
Government Accountability Office
“Accountability” is its middle name
David Walker’s Quest Fiscal integrity Long-term sustainability Concern for state and local governments
Long-term fiscal models Federal State and local
3www.bea.gov
State and Local Pension Systems
Employee contributions are generally expressed as a percent of wages
Employer contributions are irregular, tied to perceived need and ability to contribute
Benefits are usually indexed for inflation
4www.bea.gov
Model Properties
Long-term focus Abstracts from inflation
Could mis-state impacts on benefits if not indexed
Uses one discount Rate for two purposes Time value of money Rate of return
5www.bea.gov
Methodological Refinements
Disaggregated projection of employment Police and fire (20 year pensions) Education (tie employment to projected
population of school age kids) Other
Age-dependent “death rates” (recognizing trend towards greater longevity)
Variable participation rate DB share falls because of DC plans
6www.bea.gov
Simulations I’d Like to See:
Closed system simulation Lump sum needed to fund current
beneficiaries Two discount rates:
Pure time value of money Investment rate of return
Variable “death rate” Ideally, age dependent
7www.bea.gov
Most Important Take-Away
Results are highly sensitive to assumptions: Base case (5% rate of return) shows
employer contribution rate of 8.9% is needed
But a 3.0% rate of return raises the contribution rate to 17.3%
8www.bea.gov
Future Work
Post-employment health benefits
Impact of DC plans
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