This paper uses a simulated public pension system to examine the sensitivity of actuarial input changes on funding ratios and contribution requirements. We examine instantaneous and lagged effects, marginal and interactive effects, and effects under different funding conditions and demographic profiles. The findings emphasize the difficulty of conducting cross-sectional analyses of public pension systems and point to several important considerations for future research.
The financial condition of public pensions has drawn significant scrutiny in recent years. Much of that attention focuses on the effect of actuarial assumptions and methods on the accuracy of pension liabilities and the adequacy of sponsor funding practices. For example, there is an active debate on whether public pensions should continue to use discount rates that reflect historical investment returns (NASRA 2015) or select actuarial discount rates that reflect the certainty of future benefit payments (Biggs 2012; Novy-Marx and Rauh 2011). In 2013, Moody’s Investor Services adopted its own actuarial procedures to evaluate the financial condition of public sector pension systems, rather than rely on valuations reported under generally accepted accounting principles (Moody’s 2013). And, the Governmental Accounting Standards Board recently revised pension accounting standards (GASB 67 and 68) to significantly change the way actuarial inputs affect financial reporting (GASB 2012).
