Essays in pension underfunding The case of the U.S. state pension funds

The thesis provides an overview of the funding situation across the U.S. state pension plans. Given the substantial aggregate mismatch between the plans’ assets and liabilities, the thesis investigates how this implicit pension debt affects the state’s costs of borrowing. The states with more underfunded pension plans have higher yields, but this relationship is only visible for the time period starting with the financial crisis, suggesting that the experience of such a financial turmoil might have made investors more aware of the underfunding problem. The thesis further explores what the contract values of the various stakeholders of a typical U.S. state civil servants pension fund are under the continuation of current policies and how they are affected under alternative policies, such as changes in contribution, indexation and investment allocation policies. The remaining thesis explores structural pension system reforms, which is another way of addressing the underfunding problem. One such reform is closing the existing defined benefit plan and starting up an alternative defined contribution system instead. As an alternative to the defined contribution plan a notional defined contribution solution is also explored. The thesis also analyses how different levels of closing the defined benefit system – whether closing it only for new entrants or for new accrual of existing members too – affects the balance between the tax payers and participants. Each such transition causes intergenerational transfers among tax payers and plan participants.