Association for Public Policy Analysis & Management

It is well-known that public pension plans, especially those of teachers, exhibit substantial cross-subsidies, across generations (through unfunded liabilities) and within generations (e.g. from those who exit before vesting or some specified retirement age vs. those who retire at the “sweet spot”). These cross-subsidies are usually measured in terms of pension wealth, i.e., present value of the difference between benefits and contributions (Costrell and Podgursky, 2010). Moreover, the cross-subsidies across and within generations have never been provided in an integrated format. Our proposal has two features: (1) we calculate the cross-subsidies as annual contribution rates required to fund the benefits (normal cost rates, building on the work of Costrell and McGee, 2017); and (2) we present these cross-subsidies in a unified framework, to show how the winners are funded by the losers within their cohort and by subsequent cohorts. For example, we may find that the winners in any given cohort (those who retire at or near the “sweet spot”) receive benefits that cost, say, 15 percent per year more than is purportedly contributed on their behalf, with 5 percent coming from those in the same cohort who leave early and 10 percent coming from employer contributions for future cohorts. In previous work (cited above) we have shown how these cross-subsidies within cohorts can be expressed as widely varying employer matches on the normal cost contribution rates, for California. We extend this work in two dimensions – (i) integrating with cross-subsidies from future generations; and (ii) adding other states for comparison.