Defining and Quantifying the Pension Liabilities of Government Entities in the United States

Date01 January 2018
Published date01 January 2018
© 2018 Wiley Periodicals, Inc.
Published online in Wiley Online Library (
DOI 10.1002/jcaf.22320
Defining and Quantifying the
Pension Liabilities of Government
Entities in the United States
Nathan H. Jeppson, John A. Ruddy, and David F. Salerno
In today’s low interest rate environment, accounting
standards and investment return assumptions are
crucial when determining the amount of defined
benefit pension plan obligations. Examining public
pension plan data provided by the U.S. Census
Bureau, we show a negative trend in pension plan
liabilities of government entities in the U.S. Despite
using aggressive return and discount rate assump-
tions, defined benefit pension plans of government
entities in the U.S. currently have an estimated pen-
sion liability of over $1 trillion. When more realistic
investment assumptions are utilized, the estimated
defined benefit pension liability increases to over
$5 trillion. Although over the past twenty years,
while many for-profit companies have eliminated
defined benefit pension plans years to avoid the
risk of underfunding, a high percentage of federal,
state and local governments continue to offer
defined benefit pensions plans to new and current
employees. This has led to growing pension liabili-
ties for government entities in the U.S. resulting in
problematic financial positions, difficult decisions,
and grim future outlooks. © 2018 Wiley Periodicals, Inc.
Editorial Review
The Wall Street
Journal recently
reported that the
current low-interest-
rate environment has
reduced asset values
in the world’s larg-
est pension funds
by $530 billion. As
central banks low-
ered interest rates
during and after the
financial crisis to
help improve eco-
nomic conditions,
more than 100 mil-
lion government
workers’ and retirees’
pensions worldwide
became seriously
threatened (Martin,
Kantchev, & Nar-
ioka, 2016). In 2016,
Moody’s Investors
Service (Moody’s)
estimated that U.S.
federal, state, and local govern-
ment employee pension plans
were underfunded by about
$7 trillion, with $3.5 trillion
(equal to approximately 20%
of the U.S. gross domestic
product [GDP]) coming from
the underfunded
defined benefit (DB)
obligations of fed-
eral government
employees (Bryan,
2016). Furthermore,
investment return
assumptions made by
government entities
are likely too opti-
mistic. For example,
even if government
pensions averaged a
7.6% return per year
in perpetuity, the
pension plans would
still be underfunded
by $1.2 trillion
(Matthews, 2016).
This problem extends
beyond U.S. borders
as well. In 2016,
Citibank reported
that underfunded
government pension
liabilities for the 20
OECD (Organisation
for Economic Co-
operation and Development)
nations were estimated to be
$78 trillion, which was 177% of

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