1

Projecting State & Local Government Retirement Costs

version 3

BEA Government Statistics Users ConferenceSeptember 14, 2006

Richard Krashevski, GAO

and

Jeremy Schwartz, GAO and GWU

The authors are solely responsible for this presentation and the estimates should not be attributed to the U.S. Government Accountability Office.

2

Purpose of the Projections:

• Part of GAO effort to assess fiscal outlook of federal, state and local governments

• Since 1992 GAO has published long-term fiscal simulations of federal deficits & debt

• Recent effort to include state & local sector in long-term fiscal outlook analysis

• Pension costs are a key part of this effort

3

Steps used to find the government’s required pension contribution:

Steps:– Project employment– Project wages– Project the growth in the number of beneficiaries– Project the growth in real benefits per beneficiary – Project employee contributions as a constant % of

future wages– Determine the government’s contribution rate as the

the PV of future liabilities minus the sum of the PV of employee contributions and 2005 assets, all divided by the PV of future wages

4

Pension Model Variables• eglsall: state and local employees (NIPA). Grows with population (np)

• np: U.S. Population. Grows at OASDI Trustees’ assumed rates = declining gradually from 0.8%/yr to a steady 0.3%/yr beginning in 2043.

• jecistlcr: real employment cost index for state and local government employees (BLS). Growth equals difference between CBO eci and cpiu growth assumptions (3.3% - 2.2% = 1.1%)

• cpiu: consumer price index (BLS). Grows at CBO’s assumed rate = 2.2%.

• gslcwageallr: aggregate real wages paid to state and local workers (NIPA). Grows with real employment cost index (jecistlcr) and population (np).

• beneficiaries: state and local pension benefit recipients (Census). Growth determined by lagged employment growth.

• deathrate: assumed percentage of retirees that are deceased in the current year. Based on SSA terminated beneficiaries = 3.67% of beneficiaries.

• penbenr: real aggregate pension payments made to state and local pension beneficiaries (NIPA). Depends on projected beneficiaries and real benefit per beneficiary.

• eeconpenr: real aggregate pension contributions by state and local employees (NIPA) = 4.7% of wages & salaries.

• rpenreal: real return on pension assets (GAO Analysis). Average real return on Flow of Funds retirement fund asset categories from 1965-2005 times their average share of assets over the last ten years = 5.0%.

• contributionrate: state and local government pension contributions as a percentage of state and local aggregate wages (GAO Analysis).

5

Pension Model Equations

171,91,11,

16,8,,

1

1 )4ttDttCttN

ttDttCttN

t

t

t

t

jecistlcrwjecistlcrwjecistlcrw

jecistlcrwjecistlcrwjecistlcrw

iesbeneficiar

penbenr

iesbeneficiar

penbenrb

11 )1

t

ttt np

npegslallegslall

111 )2

tt

tttt egslalljecistlcr

egslalljecistlcrlrgslcwageallrgslcwageal

1

1 )5

t

t

t

t

lrgslcwageal

eeconpenr

lrgslcwageal

eeconpenr

)(egslalld.)(egslalld.)(egslalld.)(egslalld.

)(egslalld.)(egslalld.)ries(beneficiad

t-t-t-t-

t-t-t

21222324

2534

log320log050log020log040

log040log520log )3

w,w,)1(

w)4 11,

1,

11,

t

tttD

t

ttC

t

ttttN iesbeneficiar

iesbeneficiardeathrate

iesbeneficiar

iesbeneficiar

iesbeneficiar

iesbeneficiardeathrateiesbeneficiara

400

1

400

1 )1()1( )6

iii

ii

ii

rpenreal

lrgslcwagealAssets

rpenreal

eeconpenrpenbenronratecontributi

6

Lagged Employment Growth Weights Determine Beneficiary Growth

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

(45) (43) (41) (39) (37) (35) (33) (31) (29) (27) (25) (23) (21) (19) (17) (15) (13) (11) (9) (7) (5) (3) (1)

Lagged Change in Employment

We

igh

t

7

Forecast and Actual State and Local and Social Security Retirees

0

20

40

60

80

100

120

1992 1997 2002 2007 2012 2017 2022 2027 2032 2037 2042 2047 2052 2057 2062 2067 2072 2077

So

cia

l S

ec

uri

ty R

eti

ree

s(m

illi

on

s)

0

2

4

6

8

10

12

14

16

Sta

te a

nd

Lo

ca

l Re

tiree

s (m

illion

s)

Social Security Trust Fund Retirees State and Local Estimated Retirees State and Local Actual Retirees

Source: Census Bureau (Actual State and Local Retirees), Social Security Administration (Social Security Retirees), GAO Analysis (Forecasted State and Local Retirees)

8

Composition of Pension Fund Assets: Shift to Equities

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

1952 1955 1958 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003

Pe

rce

nta

ge

of

Pe

ns

ion

As

se

ts

Equities Fixed Income

Source: Federal Reserve Flow of Funds Accounts

9

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

1970 1975 1980 1985 1990 1995 2000 2005

Co

ntr

ibu

tio

n R

ate

Contribution Rate Real Return on Assets

Source: Bureau of Economic Analysis NIPA Accounts (Contribution Rate). Federal Reserve Flow of Funds Accounts (Real Return on Assets).

Real return averages -0.3% from 1977 - 1980.

The contribution rate rises from 10.5% to 11.7% from

1978 to 1983.

Historic Contribution Rate and Return on Pension Assets

Real return averages 16.4% from 1996 -

1999. The contribution rate falls from 8.9% to 6.3% from 1997 to 2001.

10

Contribution Rate: Sensitivity to Real Return on Assets

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Co

ntr

ibu

tio

n R

ate

Contribution Rate 5% Real Rate 4.9% Real Rate 4% Real Rate 3% Real Rate

Source: Actuals based on Bureau of Economic Analysis NIPA Accounts. Forecast based on GAO Analysis.

8.9% (Base Case)

9.3%

13.0%

17.3%

8.6% (2005)

11

Contribution Rate: Sensitivity to Pension Assets (1%)

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Co

ntr

ibu

tio

n R

ate

Contribution Rate Forecasted Contribution Rate 1% Lower 2005 Assets 1% Higher 2005 Assets

Source: Actuals based on Bureau of Economic Analysis NIPA Accounts. Forecast based on GAO Analysis.

8.9% (Base Case)

8.7%

9.0%

8.6% (2005)

12

Contribution Rate: Sensitivity to Pension Assets (1 standard dev.)

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Co

ntr

ibu

tio

n R

ate

Contribution Rate Forecasted Contribution Rate

One Standard Deviation Higher Return in 2005 One Standard Deviation Lower Return in 2005

Source: Actuals based on Bureau of Economic Analysis NIPA Accounts. Forecast based on GAO Analysis.

9.7%

8.9% (Base Case)

8.0%

8.6% (2005)

13

Contribution Rate: Ten Year Delay to Adjustment

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025

Co

ntr

ibu

tio

n R

ate

Contribution Rate Forecasted Contribution Rate 10 Year Delay

Source: Actuals based on Bureau of Economic Analysis NIPA Accounts. Forecast based on GAO Analysis.

8.6%

9.0%

8.9% (Base Case)8.6% (2005)