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The Commitment Credibility of Public-Employee Pensions

  • Author(s): Brooks, John Edward
  • Advisor(s): Gailmard, Sean
  • et al.
Abstract

Public-employee pensions have grown significantly in cost in recent years, and will continue to be one of the central policy problems that state and local governments confront in the 21st Century. Pensions show United States' federalism at work: they vary tremendously across and within states. I examine the causes and consequences of this variation. Specifically, I ask how democratically-elected politicians can commit to pension performance, and what are consequences do pensions and politicians' decisions have?

This dissertation presents three separate empirical papers using data from 103 plans across all 50 states from 2001-2011. I also include introductory, transitional, and concluding sections. As discussed both here and in prior literature, politicians have clear incentives to compensate employees through pensions, while disguising expenses and skipping payments. This has led to significant costs and increased attention to pensions.

The first paper focuses on the factors leading to variation in pensions' financial performance, or funding ratios. Centrally, I find that as management board personnel is increasingly insulated from political control, performance improves. The second paper focuses on politicians' contributions into funds. There, I uncover evidence that politicians prefer to commit to pensions covering police and fire employees. They also tend to skip payments when prior economic performance and investment returns are higher. This shows that elected officials prefer to keep taxes low when possible, even at the cost of underfunding pensions.

The third paper pivots to examine a consequence of pensions: how they affect public-employee retirement rates. I present a simple theoretical model showing how reductions in commitments from employers might make public-employees less likely to believe they will receive their full pension benefits, and in turn, more likely to retire. I then present empirical evidence that as pensions are more controlled by politicians, retirements increase. Poorer funding from the prior year also is associated with increased retirements, providing evidence that performance generates feedback effects for human capital. Jointly, my papers provide broad and novel insight into the causes and consequences of variation in public pensions.

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