Sustainability of the Funded Ratio and Asset Allocation Choice of State Public Pension Plans

Abstract

The paper examines State Public Pension Plans in the United States and the sustainability of their funded ratios. The authors apply a panel logit with random effects regression model of asset allocation choice and average returns during fiscal years 2001 to 2015. There are three key factors which adequately fund State Public Pension Plans: (i) current member contributions, (ii) members’ employer contributions, and (iii) investment returns on those contributions. Returns on those contributions depend heavily on allocation choice of those funds in traditional and alternative investments. Alternatives are generally assumed to provide higher average returns with higher risk. This paper shows that in the long-term, investment in traditional assets such as bonds, equities and short-term cash have a higher likelihood of funding State Public Pension Plan’s payment obligations to beneficiaries.