Floods and Deserts: Why the Dream of a Secure Pension for Everyone Is Still Unattained

Abstract

Many public defined-benefit pension plans, after entering this century adequately funded, have become seriously underfunded because pension sponsors behaviorally “anchored” on exceptionally high stock market returns in 1982–1999. They made pension promises and budgeted for pension contributions as if these high returns would continue. Instead, starting in 2000, returns were well below expectations. In addition, the present values of plan liabilities have mushroomed because interest rates have fallen to historic lows. The authors suggest that public plan sponsors and beneficiaries can contribute to fixing their pension programs by improving public sector productivity and using the cost savings from these gains to fill current funding gaps.