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The Political Economy of Underfunded Municipal Pension

Author

Listed:
  • Jeffrey Brinkman
  • Daniele Coen-Pirani
  • Holger Sieg

Abstract

This paper analyzes the determinants of underfunding of local government?s pension funds using a politico-economic overlapping generations model. We show that a binding down payment constraint in the housing market dampens capitalization of future taxes into current land prices. Thus, a local government?s pension funding policy matters for land prices and the utility of young households. Underfunding arises in equilibrium if the pension funding policy is set by the old generation. Young households instead favor a policy of full funding. Empirical results based on cross-city comparisons in the magnitude of unfunded liabilities are consistent with the predictions of the model.

Suggested Citation

  • Jeffrey Brinkman & Daniele Coen-Pirani & Holger Sieg, 2016. "The Political Economy of Underfunded Municipal Pension," Working Papers 16-16, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:16-16
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    File URL: https://www.philadelphiafed.org/-/media/frbp/assets/working-papers/2016/wp16-16.pdf
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    Cited by:

    1. Levon Barseghyan & Stephen Coate, 2017. "On the Dynamics of Community Development," NBER Working Papers 23674, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Unfunded Liabilities; Political Economy; Land Prices; Capitalization;
    All these keywords.

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations
    • R5 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis

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