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State pension contributions and fiscal stress*

Published online by Cambridge University Press:  25 August 2015

DAVID SPLINTER
DAVID SPLINTER*
Affiliation:
Economist for the staff of the Joint Committee on Taxation, U.S. Congress, 1625 Longworth Building, Washington, DC 20515, USA
*
(e-mail: [email protected])
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Abstract

Fiscal stress pressures state legislators to either raise taxes or cut spending, but public pensions provide a vehicle to postpone tax increases and maintain current spending. I estimate that states cut their pension contributions at seven times the rate of other spending in response to fiscal stress. The cumulative impact of state undercontributions due to fiscal stress explains about 4% of mid-2008 actuarial underfunding. States not paying actuarially required contributions for reasons other than fiscal stress explains an additional quarter of underfunding. As investment returns explain little underfunding, much underfunding appears due to insufficient employee and actuarially required government contributions to keep up with growing pension liabilities.

Keywords

H71H72H75Public pensionspension underfundingcyclical fiscal policystate fiscal policybalanced budget requirements
Type
Articles
Information
Journal of Pension Economics & Finance , Volume 16 , Issue 1 , January 2017 , pp. 65 - 80
Creative Commons
This is a work of the U.S. Government and is not subject to copyright protection in the United States.
Copyright
Copyright © Cambridge University Press 2015

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Footnotes

*

This paper has benefited from comments from Richard Boylan, Vivian Ho, John Diamond, Rachel Moore, John Nye, Barry Poulson, and Jason Saving. I thank Keith Brainard and Liz Antin for providing pension data and Thad Calabrese for providing pension obligation bond data. This research embodies work undertaken for the staff of the Joint Committee on Taxation, but as members of both parties and both houses of Congress comprise the Joint Committee on Taxation, this work should not be construed to represent the position of any member of the Committee.

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