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Pension Security Bonds: A New Plan to Address the Pension Crisis

May 19, 2010 by Josh Rauh

Today I am speaking at a conference in Washington hosted by the University of California Retirement Security Institute. I am unveiling a plan called “What the Federal Government Should Do About State Pension Liabilities,” jointly authored with Robert Novy-Marx. As I have blogged previously, states are making financial promises that they cannot possibly keep, and the bills are coming due much sooner than you think. Unless action is taken soon, the federal government will face intense pressure to bail out the affected states, at a price tag of $1 trillion or more.

Plan to save state pension funds by Rauh and Novy-Marx

Full text of Rauh & Novy-Marx plan (PDF)

The outline of the plan is that the federal government should cut a deal with states. They should allow a state to issue tax-subsidized bonds for the purpose of pension funding for the next 15 years — if and only if the state government agrees to take three specific measures to stop the growth of unfunded liabilities:

  1. The state must close its defined benefit plans to new employees under a “soft freeze” and agree not to start any new defined benefit plans for at least 30 years.
  2. The state must annually make exactly its actuarially required contribution (ARC) left over from the existing underfunded plans; only the amount of that ARC will be subsidized.
  3. The state must include its new workers Social Security, and provide them with an adequate defined contribution plan, again for at least 30 years. To this end, the federal government should start a Thrift Savings Program for state workers and operate it alongside the existing Thrift Savings Program for federal workers.

Rauh's slides, May 19, 2010 (PowerPoint)

The tax subsidies for these new Pension Security Bonds would work like Build America Bonds, with the federal government paying 35% of all coupon payments directly to the state. The cost of this subsidy will be in large part offset by the gains to the Social Security system of bringing in new state workers.

Here are links to the full plan and to my slides from the presentation.


Media inquiries can be directed to:
Aaron Mays
Kellogg School of Management at Northwestern University
(847) 491-2112
A-Mays@Kellogg.Northwestern.edu

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Posted in federal debt, pensions, public finance | 5 Comments

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  1. on May 19, 2010 at 10:24 am Tweets that mention Pension Security Bonds: A New Plan to Address the Pension Crisis « Everything Finance -- Topsy.com

    […] This post was mentioned on Twitter by Kellogg School. Kellogg School said: 3 measures the federal gov't should take to address the state pension crisis http://ow.ly/1N415 #Kellogg Prof Josh Rauh shares his plan […]


  2. on May 19, 2010 at 2:50 pm P.S. Pension funds in peril « Expertly Wrapped

    […] his blog post at Everything Finance: The federal government should cut a deal with states.They should allow a […]


  3. on June 16, 2010 at 4:51 am Toxic Pension and Municipal Bonds; State and Local Borrowing Hits All-Time High | W DE WEB

    […] Even though pension bonds issued since 1992 have been money losers for states and cities., professor Joshua D. Rauh, at the Kellogg School of Management, Northwestern University, has proposed Pension Security Bonds in a New Plan to Address the Pension Crisis. […]


  4. on September 23, 2010 at 2:18 pm Muni meltdown must be part of fiscal solution | Statehousenewsonline.com

    […] renegotiate terms of payback. As for the pension debt, Rauh proposes federally subsidized “pension security bonds” coupled with rapid revolutionary reform of public pensions. And, even though GAO says it […]


  5. on December 9, 2011 at 11:21 am Toxic Pension and Municipal Bonds; State and Local Borrowing Hits All-Time High | Easy Mortgage 2012

    […] Even though pension bonds issued since 1992 have been money losers for states and cities., professor Joshua D. Rauh, at the Kellogg School of Management, Northwestern University, has proposed Pension Security Bonds in a New Plan to Address the Pension Crisis. […]



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