Causes and Ramifications of Public Pension Fund Underfunding

Abstract

The problem of public pension plan underfunding has grown increasingly acute in recent years for numerous states and cities including Illinois, New Jersey, Connecticut, Charleston, Chicago and Philadelphia. Underfunded pension systems have profound implications for state and local governments' ability to provide basic services to their citizens and calls into question the retirement security of their public employees. The history of the severely underfunded New Jersey pension funds will be examined in order to understand how the current crisis developed. Economic and demographic changes, conditions in the capital markets, political and budgetary priorities and pressures, and actuarial conventions will be examined in order to highlight how the crisis is the result of the complex interaction of social, political and economic forces. The primary focus will be on how the capital markets influence the funding levels of pension systems and the options for government action.