The Political Economy of Public Pensions: Pension Funding, Governance, and Fiscal Stress

Abstract

The purpose of this paper is to describe and evaluate how public sector defined benefit pension plans are managed, and to assess possible implications of different pension management styles for promised pension benefits. The authors explore the actuarial and economic assumptions employed by public pension managers when they set funding targets, using a new survey of state and local pension plans in the United States. The analysis shows that key assumptions under the control of public pension plan trustees are sensitive to factors in the pension environment. An implication of the paper is that public pension funding patterns may become more sensitive to strategic selection of interest rate and other key assumptions as public sector budgets are subjected to fiscal pressures, and when they are managed by participant-run boards.