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.
"The Political Economy of Municipal Pension Funding."
American Economic Journal: Macroeconomics,
State and Local Budget and Expenditures
State and Local Government: Health; Education; Welfare; Public Pensions
Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
Public Sector Labor Markets