The Political Economy of Municipal Pension Funding

Abstract

Many US municipalities have committed to pay retirement benefits to public sector employees but have not saved enough to fulfill these obligations. This paper studies the determinants of municipal pension funding and its implications for intergenerational redistribution using an overlapping generations model. Under perfect capital markets, pension funding choices are fully capitalized into land prices. This neutrality result fails if agents face a binding downpayment constraint in the land market: old agents prefer a pay-as-you go system, while young agents find a fully funded system optimal. Empirical evidence based on cross-city comparisons of pension liabilities is consistent with these predictions. (JEL H72, H75, J32, J45)