The Political Economy of U.S. Public Pension Plans and Their Unfunded Liabilities

Chapter 1 applies a public choice approach to the problem of unfunded pension liabilities and adopts the methodology of Congleton and Shughart (1990) to model underfunding of state-level public pension plans using the median voter theorem, along with the theory of capture by special interest groups, and a combined model of the two. With panel data from 2001 to 2009, the paper finds that the combined model provides the strongest explanation for the current levels of unfunded liabilities; hence, both median voter preferences and special interest group influence are affecting political outcomes. The special interest group model slightly outperforms the median voter model in direct comparisons. (2) Public pension plans in the United States face unprecedented insolvency risk from unfunded liabilities. Reforming state-level public retirement systems requires legislative action in most states, exposing the process of pension reform to various political influences. Chapter 2 examines financial as well as political factors of public pension plans, comparing possible political motivations for pension reform. The empirical results suggest that pension reform decisions are largely independent from political biases and are primarily a response to pension underfunding. In addition, the paper examines a hypothesis that news media have an important role in the political process of pension reform by providing low cost information to pension stakeholders. Empirical evidence confirms that the dissemination of popular information on public pensions is a significant positive predictor of legislative reforms. (3) State and local public pension promises to government employees are binding governmental commitments in most states. Public pension benefits have multiple levels of protection, including both those associated with contract and constitutional law. The variety across states provides an unique opportunity to study the constitutionalization of government obligations. Chapter 3 describes the various legal interpretations of state and local public pension promises and uses statistical analysis to explore the implications of the various forms of benefit protections on pension funding as well as other plan characteristics