An Actuarial and Economic Analysis of State and Local Government Pension Plans

A study of future economic problems is being directed by the Joint Economic Committee. The goal of the study is to obtain more accurate estimates of future outlays from pension plans and the potential effect of these outlays on the Nation's economic resources. The main focus of the study was projecting the cost to State and local government pension plans of future benefit payout. To place benefit payout in perspective, benefit projections were compared to contribution and asset growth projections which allowed a simplified flow of funds analysis. The projections presented do not pretend to predict future events exactly. Their purpose is to provide a better understanding of emerging financial problems, given reasonable assumptions about future economic and demographic changes. The projections are a result of aggregating all state and local government pension plans into two prototypes. Aggregating the plans masks the differences among them, but allows a clear look at long-term trends so that problems can be addressed before they become worse. The basic approach of the analysis was to: (1) divide the universe of over 6,600 state and local pension plans into homogeneous subdivisions, (2) develop prototypical plans representing the current characteristics of state and local government employees, (3) forecast employment and salary levels for each subdivision using reasonable assumptions about future economic and demographic growth, and (4) create an actuarial model to project cost streams and employment levels for the prototypical plans.