There is an ongoing debate in policy circles about the appropriate accounting standards for public sector pension funds. There are major differences between the standard practice of most pension funds and the policies that are advocated by many academic economists, most notably Robert Novy-Marx and Joshua Rauh (NM&R). In several papers they argue that most public sector pension funds are severely underfunded.
In order to get a sense of the plausible size of this impact, this paper calculates the impact on the economy of adopting NM&R funding rules during the last recession. Specifically, it calculates the impact on GDP and employment if state governments had decided to fill the funding gap calculated by NM&R over a 15-year time horizon, as they advocate.