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The 2015 Pension 40: Joshua Rauh

No. 30 Joshua Rauh, Professor of Finance / Stanford Graduate School of Business

Joshua Rauh
Professor of Finance / Stanford Graduate School of Business
Last year’s rank: 29

When the Pew Charitable Trusts reported in July that U.S. state-run retirement systems ran a $968 billion funding gap in 2013, near-retirees across the nation surely shuddered. Unfortunately, Joshua Rauh, professor of finance at the Stanford Graduate School of Business, believes that gap is more than three times that size. The discrepancy lies in the source of information: Pew takes data from state government disclosures, whereas Rauh recalculates the numbers to better reflect reality. “In order to keep up with ever-rising liabilities, state funds apparently need unbelievably good performance,” says Rauh, 41, who has taught at the University of Chicago Booth School of Business and at Northwestern University’s Kellogg School of Management. The trouble is, funds tend not to live up to their predicted returns on risky assets — a median of 7.75 percent — by the time retirement benefits have to be paid out, Rauh’s research suggests. The “wild return assumptions,” to use his phrase, don’t reflect the fact that benefits have to be disbursed no matter what occurs in the stock market. As a result, unfunded liabilities end up being considerably larger than initially forecast; meanwhile, public retirement systems are accruing new promises faster than they can pay off existing ones. “We’re living through one of the greatest bull markets in the history of stock markets, and to assume that that’s going to continue and to budget accordingly seems to be a very flawed assumption,” says Rauh. The Boston native, who received a Ph.D. in economics from Massachusetts Institute of Technology in 2004, believes this accounting methodology allows state and local governments to run unbalanced budgets while claiming the contrary. He reckons the funding shortfall totals $3.28 trillion; until public pension fund managers acknowledge that reality, he says, they will remain in hot water.

The 2015 Pension 40

1. Bruce Rauner
2. John & Laura Arnold
Laura and John Arnold Foundation
3. Chris Christie
New Jersey
4. Randi Weingarten
AmericanFederation of Teachers
5. Phyllis Borzi
U.S. Department
of Labor
6. Kevin de León
7. Alejandro García Padilla
Commonwealth ofPuerto Rico
8. Laurence Fink
9. Rahm Emanuel
10. Sean McGarvey
North AmericanBuilding Trades Unions
11. John Kline
12. J. Mark Iwry
U.S. Treasury
13. Damon Silvers
14. Jeffrey Immelt
Electric Co.
15. Joshua Gotbaum
Brookings Institution
16. Robin Diamonte
United Technologies Corp.
17. Mark Mullet
18. Terry O'Sullivan
Laborers' International Union of North America
19. Raymond Dalio
Bridgewater Associates
20. Ted Wheeler
21. Thomas Nyhan
Central States Southeast and Southwest Areas Pension Fund
22. Karen Ferguson & Karen Friedman
Pensions Rights Center
23. Randy DeFrehn
National Coordinating Committee forMultiemployer Plans
24. Robert O'Keef
Motorola Solutions
25. Caitlin Long
Morgan Stanley
26. Kenneth Feinberg
The Law Offices
of Kenneth R. Feinberg
27. Orrin Hatch
28. Kathleen Kennedy Townsend
Center for Retirement Initiatives, Georgetown University
29. Ian Lanoff
Groom Law Group
30. Joshua Rauh
Stanford Graduate School of Business
31. Ted Eliopoulos
California Public Employees' Retirement System
32. Edward (Ted) Siedle
Benchmark Financial Services
33. Teresa Ghilarducci
New School for Social Research
34. Denise Nappier
35. W. Thomas Reeder Jr.
Pension BenefitGuaranty Corp.
36. Hank Kim
National Conference on Public Employee Retirement Systems
37. Paul Singer
Elliott Management Corp.
38. Bailey Childers
National PublicPension Coalition
39. Amy Kessler
Prudential Financial
40. Judy Mares
U.S. Labor Department

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