Analyzing the Interplay Between Public-Pension Finances and Governmental Finances: Lessons from Linking an Economic Model to a Pension Fund Model

Source: Yimeng Yin -The Nelson A. Rockefeller Institute of Government, Don Boyd – Center for Policy Research, The Rockefeller College, University at Albany, July 11, 2018, Paper prepared for: Brookings Municipal Finance Conference July 17, 2018

…. Research suggests that the real world differs from these assumptions, in some ways that mean the assumptions may understate risks, and in other ways that mean the assumptions may overstate risks. Investment returns may not be normally distributed and may not be independent over time. Perhaps more important, investment returns and tax revenue may be correlated: a poor economy may cause investment returns to fall short of expectations, and may also cause tax revenue to fall short. The resulting increase in required employer contributions may cause additional fiscal pressure if increases come when tax revenue is low.

We address these issues, focusing on the correlation between tax revenue and the economy, by building a small macroeconomic model that can generate internally consistent stochastic scenarios of growth in real gross domestic product (GDP) and returns from stock and bond investments. ….

Related:
View Yin & Boyd’s slides
View Quinby’s slides
Laura Quinby – Center for Retirement Research, Boston College