The Effects of Political Competition on the Funding and Generosity of Public-Sector Pension Plans
AbstractIn politically competitive jurisdictions, there can be strong electoral incentives to underfund public pensions in order to keep current taxes low. I examine this hypothesis using panel data for 2,000 municipal pension plans from Pennsylvania. The results suggest that as a municipality becomes more politically competitive, it tends to have pension plans that are less funded, more generous, and use higher interest rates at which to discount future actuarial liabilities. An increase in the level of political competition by one standard deviation leads to a decline in the actuarial funded ratio of about 7â10 percent, an increase in the annual average retirement benefits of about $470â620 per retiree, and an increase in the interest rate for discounting actuarial liabilities of about 5 basis points. Instrumental Variable (IV) estimates generated using demographic characteristics of the population as instruments corroborate these findings.
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Date of creation: 22 Dec 2013
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Find related papers by JEL classification:
- H75 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Government: Health, Education, and Welfare
- J45 - Labor and Demographic Economics - - Particular Labor Markets - - - Public Sector Labor Markets
This paper has been announced in the following NEP Reports:
- NEP-AGE-2013-12-29 (Economics of Ageing)
- NEP-ALL-2013-12-29 (All new papers)
- NEP-POL-2013-12-29 (Positive Political Economics)
- NEP-PUB-2013-12-29 (Public Finance)
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