Defined Benefit Public Pension Funding Determinants and Consequences: A Review of the Literature

Abstract

Public employee pension funding in the United States continues to be a topic of interest to both practitioners and researchers. Early works in this area date back to Mumy (1978). However, it wasn't until the mid-1990s that the stream of research on public pension funding resurfaced. the objective of this essay is to provide an overview of the literature on defined benefit pension funding in the public employee pensions sector in the United States over the approximately past 20 years and to highlight research areas where there may be gaps. Empirical research on defined benefit pension funding has predominantly focused on the antecedents or determinants of the pension funded status, motivated in large part by the magnitude of underfunding. These studies are often concentrated on a subset of (typically) larger, state-wide systems, given existing data limitations. Thus, this essay outlines how research has evolved and aggregates the works on determinants of defined benefit pension funding at three levels: states’ plan level, local level across states, and local and/or specific state level. It also presents the research available on the consequences of defined benefit pension funding. This review reveals limited research on the consequences of pension funding and highlights opportunities for related future empirical research in this domain.