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The 2015 Pension 40: Joshua Rauh

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

By Tyler Davies

December 22, 2015

< The 2015 Pension 40: The Long Climb

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