Labor Economics Commons^™

Assessing The Impact Of Investment Shortfalls On Unfunded Pension Liabilities: The Allure Of Neat, But Faulty Counterfactuals, Robert M. Costrell

Education Reform Faculty and Graduate Students Publications

In this paper I provide a methodological critique of the conventional method for assessing the impact of investment shortfalls and other contributors to unfunded pension liabilities, and offer a methodologically sound replacement with substantive policy implications. The conventional method – simply summing the annual actuarial gain/loss figures over time – provides a neat, additive decomposition of the sources of the rise in the Unfunded Accrued Liability (UAL). In doing so, however, it implicitly assumes that in the counterfactual exercise, amortization would adjust dollar-for-dollar with the interest on additional UAL. That is, even if the total (and average) shortfall from covering …