Document Type
Article
Publication Date
11-2023
Keywords
public pension finance; H75
Abstract
We propose an economic reformulation of contribution policy integrating: (1) formalization of sustainability as the steady-state contribution rate, incorporating both the expected return on risky assets and a low-risk discount rate for liabilities; (2) derivation of contribution adjustment policies required for convergence toward the target funded ratio and contribution rate; and (3) a stylized optimization framework for simultaneous determination of the target portfolio return and funded ratio. This analysis provides new theoretical insights into the basis for pre-funding vs. pay-as-you-go, resting on the convexity of the long-run risk–return relationship, and also potentially practical guidelines for contribution policy.
Citation
Costrell, R., & McGee, J. B. (2023). Toward an Economic Reformulation of Public Pension Funding. Journal of Pension Economics & Finance, 1-29. https://doi.org/10.1017/S1474747223000173
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