Breaking Bad: Public Pensions and the Loss of that Old-Time Fiscal Religion
15 Pages Posted: 8 Mar 2016 Last revised: 17 Dec 2016
Date Written: March 24, 2016
Despite the widespread adoption and strict enforcement of balanced budget requirements, U.S. state and local governments have accumulated trillions in unfunded pension liabilities. While many casual factors for this growth in unfunded liabilities, including liberal discount rates and inadequate funding policy, have been identified, the broader role of public choice explanations is contested in the literature. This paper contributes to this literature by offering a previously overlooked public choice explanation; the undermining of the “old-time fiscal religion.” According to this theory, balanced budgets provide taxpayer constraint on government spending by signaling a taxpayer willingness to pay assessment of government expenditures. Public choice scholars used this theory to explain the growth in federal deficit spending after Keynesian economics overturned the historic tradition of maintaining balanced budgets. Similarly, defined benefit public pensions, which allowed policymakers to make retirement promises to current employees without adequately funding these obligations, enabled policymakers to circumvent traditional balanced budget requirements, thereby undermining taxpayer constraint. Transitioning public pensions to defined contribution retirement accounts would help restore this taxpayer constraint.
Keywords: public pensions, budget constraints, old-time fiscal religion, public choice
JEL Classification: E12, H75
Suggested Citation: Suggested Citation