Fiscal condition, institutional constraints, and public pension contribution: are pension contribution shortfalls fiscal illusion?

Abstract

AbstractOne important aspect of public finance is understanding expenditure allocations among competing purposes. Applying the public choice paradigm and fiscal illusion framework, this study explores the interplay between current state expenditures and financial needs, and long‐term financial responsibility to pension funds. Using state finance and pension data during 2004–2018, we found actuarially determined employer contributions paid by a state are inversely related to budgetary fund balances, total reserve fund balances, and state expenditures. Especially when governments are fiscally stressed, state officials appear to delay pension contributions while prioritizing operational spending. Interestingly, more stringent TELs and technical BBRs are effective at promoting prudent pension fund management. The study contributes to the public finance literature by providing empirical evidence to advance the argument that government's financing choices can affect the level of public expenditure while demonstrating the mechanism of the relationship between fiscal illusion and government budgetary decisions.