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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
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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
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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
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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
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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
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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
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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%
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Future Work
Post-employment health benefits
Impact of DC plans