PENSION UNDERFUNDING AND LIBERAL RETIREMENT BENEFITS AMONG STATE AND LOCAL GOVERNMENT WORKERS

Abstract

This paper finds evidence that the relative generosity of pensions among state and local government workers is related to the ability to underfund public employee retirement plans. Since underfunding can reduce tax burdens for residents who expect to leave the community before retirement benefits are paid, governments have an incentive to offer employees generous, poorly funded pensions. Combining individual-level data from the Current Population Survey (CPS) with state-level pension plan provisions, a recursive system of equations characterizing pension underfunding levels and pension benefits is estimated. The results indicate a strong, positive relationship among underfunding levels, individual pension wealth, and taxpayer mobility.