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

• DOI: http://doi.org/10.1002/jcaf.22320
• Date: 01 January 2018
• Published date: 01 January 2018

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© 2018 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

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

INTRODUCTION

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