The effects of political competition on the generosity of public-sector pension plans

Abstract

In politically competitive jurisdictions, there can be strong electoral incentives to increase the generosity of public pensions and simultaneously, to not fund them fully, in order to keep taxes low. I examine the relationship between political competition and generosity of public pensions using a panel dataset for 3000 local plans from Pennsylvania for the period 2003–2013. I find that as the level of political competition in a municipality increases, pension plans become more generous but this relationship holds true only for plans run by municipal governments. A one standard deviation increase in the level of political competition is associated with an increase in the generosity of municipal plans by about 3 percent ($340–504/ retiree/ year) with no effect on plans run by municipal authorities. The effects of political competition are driven by municipalities that have a higher proportion of uninformed voters and are absent for defined contribution plans.