The Political Economy of Underfunded Municipal Pension Plans

62 Pages Posted: 13 Jun 2016

See all articles by Jeffrey Brinkman

Jeffrey Brinkman

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Daniele Coen-Pirani

Carnegie Mellon University - David A. Tepper School of Business

Holger Sieg

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: June 2016

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 downpayment 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

Brinkman, Jeffrey and Coen-Pirani, Daniele and Sieg, Holger, The Political Economy of Underfunded Municipal Pension Plans (June 2016). NBER Working Paper No. w22321. Available at SSRN: https://ssrn.com/abstract=2794727

Jeffrey Brinkman (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Daniele Coen-Pirani

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Holger Sieg

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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