Projecting State and Local Government Retirement Costs

1. Projecting State and Local Government Retirement Costs By Richard Krashevski, GAO Jeremy Schwartz, GAO and GWU Comments by Bruce Baker Chief State and Local Government Branch Bureau of Economic Analysis

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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%

8. Future Work • Post-employment health benefits • Impact of DC plans