Legacy Debt in Public Pensions: A New Approach
The brief’s key findings are:
- The inclusion of “legacy debt” – unfunded liabilities from long ago – with current liabilities impedes effective pension policy.
- A new approach would separate legacy debt from other unfunded liabilities in order to:
- spread the legacy cost over multiple generations; and
- properly identify fixed vs. variable costs.
- It would also use the municipal bond yield – rather than the assumed return on assets – to calculate liabilities and required contributions.
- This approach, by properly allocating costs, would improve intergenerational fairness, government resource decisions, and public credibility.