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THE 80% PENSION FUNDING TARGET, HIGH ASSUMED RETURNS, AND GENERATIONAL INEQUITY
Author(s) -
Costrell Robert M.
Publication year - 2018
Publication title -
contemporary economic policy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.454
H-Index - 49
eISSN - 1465-7287
pISSN - 1074-3529
DOI - 10.1111/coep.12200
Subject(s) - pension , economics , percentage point , investment (military) , point (geometry) , econometrics , labour economics , monetary economics , finance , political science , geometry , mathematics , politics , law
Generational inequity in pension funding is highly sensitive to the lax policies of 80% funding targets and high assumed returns to investment. I develop a simple, powerful relationship between steady‐state (SS) inequity in contributions—the percent of extra contributions to fund prior cohorts—and the SS unfunded ratio. I then show how the SS unfunded ratio is governed by x % funding targets and the gap between assumed and true returns. The SS degree of inequity is over 60% under an 80% funding target and over 50% with a one‐point gap between assumed and true returns. ( JEL H75)