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Old 07-24-2015, 05:22 PM
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Mary Pat Campbell
Join Date: Nov 2003
Location: NY
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Competition among politicians to win votes and keep taxes low is often directly linked to poorer funding for public pensions, a research paper has claimed.

The study, by Sutirtha Bagchi, assistant professor of economics at Villanova University, reported that funding levels of US public pensions are worse when local political competition is fiercer.

Bagchi studied data from 1,400 municipal pensions in Pennsylvania between 1985 and 2009. He found that increased political competition in an area correlated with pension plans being “less funded, more generous, and [using] higher interest rates at which to discount future actuarial liabilities”.

“A one standard deviation increase in the level of political competition is associated with a decrease in pension plan funding levels of approximately 7% to 10% and an increase in unfunded liabilities per active member of approximately $2,300 to $3,200,” Bagchi reported.

Bagchi cited previous research into public pension funding, which asserted that “a higher intensity of political competition exacerbates the incentives of politicians to not fund the retirement benefits that have been promised to public sector workers fully, in order to avoid raising taxes on workers in the private sector.”


The Effects of Political Competition on the Funding and Generosity of Public-Sector Pension Plans

Sutirtha Bagchi
Villanova University

July 20, 2015

In 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 7-10 percent, an increase in the annual average retirement benefits of about $470-620 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.

Number of Pages in PDF File: 65

Keywords: Public-sector pensions, political competition, unfunded liabilities, actuarial funded ratio

JEL Classification: H75, J45

It's STUMP - meep on public finance, pensions, mortality, and more

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