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The “California Rule” and Public Pensions

Sep 2017
Working Paper
By  Jeremy Bulow
Public employees’ defined benefit pensions are like defined contribution plans where the employee can only invest in one kind of asset: deferred annuities provided by a deeply underfunded “insurer” (the pension fund) and backed up by the worker’s own employer. Why would anyone put so much of their savings in such an investment? The answer is that public employers can pay employees about two dollars in benefits for every dollar they record as an expense when they pay the minimum required into their pension funds. But  deficits equivalent to many years’ payroll have accumulated, calling into question whether taxpayers will make good on all that has been promised, and whether continuing to pay employees with additional unfunded benefits is good for either workers or taxpayers.
Publication Keywords: 
public sector pensions
state and local public finance
defined benefit plans