Projecting State and Local Government Retirement CostsBy Richard Krashevski, GAO Jeremy Schwartz, GAO and GWU

Comments byBruce Baker

Chief State and Local Government BranchBureau of Economic Analysis

2www.bea.gov

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

3www.bea.gov

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

4www.bea.gov

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

5www.bea.gov

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

6www.bea.gov

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

7www.bea.gov

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%

8www.bea.gov

Future Work

Post-employment health benefits

Impact of DC plans