Abstract
We provide evidence that political pressure creates incentives for defined benefit pension plans to use higher discount rates, thus artificially reducing the reported cost of these benefit promises. We generate our inferences using a unique panel dataset for all local pension plans from Pennsylvania for 2003–2013, and by comparing the differential response of plans managed by appointed versus elected officials during a period where there was downward pressure on expected investment returns. The differential response we document is 29 basis points, which equates to a reduction in the reported liability of approximately 4.1% due to political incentives.
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