• Chart of the Week
  • January 22, 2019

City planning for retirement

Police officers performing their duties on the streets of Manhattan. New York City has one of the largest unfunded pension liabilities of any city in the US.

palinchak

Not everyone’s ears perk up at the phrase “unfunded pension and retiree healthcare liabilities of US municipalities,” but it’s more than a two hundred billion dollar problem.

City governments will either have to renege on their promises to police, firefighters, and other city workers or raise taxes on future generations.

Policymakers and accountants understand the basic problem, but research published in the July issue of the American Economic Journal: Macroeconomics highlights the political and economic factors that give rise to such funding issues in the first place.

Authors Jeffrey Brinkman, Daniele Coen-Pirani, Holger Sieg find that land prices and borrowing constraints help explain the tension over how to finance the retirement benefits of government workers.

In their model, when governments raise property taxes to fund retirement benefits for their workers, it lowers young people’s demand for homes, which reduces property values. Because older people typically own homes, they would prefer an unfunded pension system that defers property taxes, a pay-as-you-go plan.

If young generations could borrow as much as they like they’d have no problem with a pay-as-you-go system, but with borrowing constraints and down payment requirements, they prefer a fully funded plan that lowers property values today, and increases their future value.

Their model predicts that if a city has a higher concentration of older voters, then it should also have higher unfunded liabilities.


 

 

Figure 1  Brinkman, et al. (2018)

 

The authors found empirical support for their argument, as shown in the chart above of liabilities for 168 large US cities. Estimates of unfunded liabilities range from as much as $8,766 per person in New York to a surplus of $463 per person in Seattle.

Their chart shows that as the portion of older homeowners increases in a city (towards the left of the chart), the more likely the municipal government relies on unfunded promises to retirees (towards the top of the chart).

The authors’ analysis shows that increasing government debt might make young debt-constrained households worse off. However, the alternative of mandating minimum funding levels could hurt the old.