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.
“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%.” —Sutirtha Bagchi, Villanova UniversityBagchi 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 study comes amid increasing scrutiny of state and municipal pensions and their funding levels. It also follows the bankruptcies of the cities of Stockton and San Bernardino in California, both of which led to protracted legal battles involving the California Public Employees’ Retirement System.
Last year, New Jersey Governor Chris Christie outlined plans to cut the state’s contributions to its pension funds by $2.5 billion over two years in order to close a near-$1 billion budget deficit. New Jersey’s Public Employees’ Retirement System was already underfunded by more than $50 billion at the time of the announcement, according to the state’s treasury department.
Several states have seen their credit ratings downgraded due to underfunded pensions placing large burdens on government budgets.
Read his full paper, “The Effects of Political Competition on the Funding and Generosity of Public Sector Pension Plans”.
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