A Value-Based Approach to the Redesign of US State Pension Plans

Abstract

We explore the nancial sustainability of a typical U.S. state civil servants pension fund under the continuation of current policies and under alternative policies, such as changes in contribution, indexation and investment allocation policies. Applying the value-based asset-liability management method, we nd that all participant cohorts derive substantial net benet from the current pension contract, while all tax-paying cohorts have to make substantial contributions. The proposed adjustment measures can alleviate a substantial part of the burden on tax payers, although at the cost of the fund participants. Especially a policy of conditional ination indexation seems promising.