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The Economists' Voice 2.0The Financial Crisis, Health Care Reform, and More$
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Joseph Stiglitz and Aaron Edlin

Print publication date: 2014

Print ISBN-13: 9780231160155

Published to Columbia Scholarship Online: November 2015

DOI: 10.7312/columbia/9780231160155.001.0001

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Pension Security Bonds

Pension Security Bonds

A New Plan to Address the State Pension Crisis

(p.201) Chapter 26 Pension Security Bonds
The Economists' Voice 2.0

Joshua Rauh

Robert Novy-Marx

Columbia University Press

This chapter argues that the federal government should be concerned about state pension liabilities. In the absence of fundamental reform, some large state pension funds may not last through the decade. When the funds run through their assets, the size of promised benefit payments will be so large that raising state taxes enough to make these pension payments will be infeasible. The federal government will therefore face massive and likely irresistible pressure to bail out the affected state governments. The chapter proposes reforming states in pension trouble by closing defined benefit pension plans to new workers, an arrangement called a “soft freeze.” Current employees would continue to earn traditional pension benefits under the existing programs, but retirement benefits for future workers would come under a new defined contribution plan. Once a state or municipal government has stopped unfunded pension liabilities from growing, it becomes more feasible, and less costly, for the state to issue debt to improve its liquidity situation.

Keywords:   state pension liabilities, pension funds, financial reform, state taxes, defined benefit pension plans, soft freeze, retirement benefits, defined contribution plans, debt issuance

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