Public Choice

, Volume 158, Issue 1–2, pp 21–38 | Cite as

The political economy of unfunded public pension liabilities

  • Dashle G. KelleyEmail author


This paper applies a public choice approach to the problem of unfunded pension liabilities and adopts the methodology of Congleton and Shughart (1990) to model underfunding of state-level public pension plans using the median voter theorem, along with the theory of “capture” by special interest groups, and a combined model of the two. With panel data from 2001 to 2009, the paper finds that the combined model provides the strongest explanation for the current levels of unfunded liabilities; hence, both median voter preferences and special interest group influence are affecting political outcomes. The special interest group model slightly outperforms the median voter model in direct comparisons.


Public pensions Median voter theorem Special interest group theory Unfunded liabilities 



The author would like to thank Roger Congleton, William Shughart, and Russell Sobel for helpful suggestions, and thank Keith Brainard for providing data.


  1. Ahmed, S., & Greene, K. V. (2000). Is the median voter a clear-cut winner?: comparing the median voter theory and competing theories in explaining local government spending. Public Choice, 105, 207–230. CrossRefGoogle Scholar
  2. Anson, M. J. P. (2011). A discount rate for public pension plans. Journal of Investment Consulting, 12, 16–22. Google Scholar
  3. Banzhaf, H. S., & Oates, W. E. (2012). On fiscal illusion and Ricardian equivalence in local public finance. Andrew Young School of Policy Studies. Working Paper 12-15 (April). Google Scholar
  4. Barro, R. J. (1974). Are government bonds net wealth? Journal of Political Economy, 82, 1095–1117. CrossRefGoogle Scholar
  5. Barro, R. J. (2011). The coming crisis of governments. The Financial Times (August 3). Google Scholar
  6. Becker, G. S. (1983). A theory of competition among pressure groups for political influence. Quarterly Journal of Economics, 48, 371–400. CrossRefGoogle Scholar
  7. Bohn, H. (2011). Should public retirement plans be fully funded? Journal of Pension Economics and Finance, 10, 195–219. CrossRefGoogle Scholar
  8. Brown, J. R., & Wilcox, D. W. (2009). Discounting state and local pension liabilities. American Economic Review, 99, 538–542. CrossRefGoogle Scholar
  9. Brown, J. R., Clark, R. L., & Rauh, J. D. (2011). The economics of state and local pensions. Journal of Pension Economics and Finance, 10, 161–172. CrossRefGoogle Scholar
  10. CGA (2007). An analysis of public employee retirement systems in California. Newport Beach: The Center for Government Analysis. Google Scholar
  11. Clark, R. L., Craig, L. A., & Sabelhaus, J. E. (2011). State and local retirement plans in the United States. Northampton: Elgar. CrossRefGoogle Scholar
  12. Congleton, R. D. (2001). Rational ignorance, rational voter expectations, and public policy: a discrete informational foundation for fiscal illusion. Public Choice, 107, 35–64. CrossRefGoogle Scholar
  13. Congleton, R. D. (2007). Informational limits to democratic public policy: the jury theorem, yardstick competition, and ignorance. Public Choice, 132, 333–352. CrossRefGoogle Scholar
  14. Congleton, R. D., & Bennett, R. W. (1995). On the political economy of state highway expenditures: some evidence of the relative performance of alternative public choice models. Public Choice, 84, 1–24. CrossRefGoogle Scholar
  15. Congleton, R. D., & Shughart, W. F. II (1990). The growth of social security: electoral push or political pull? Economic Inquiry, 28, 109–132. CrossRefGoogle Scholar
  16. Cooper, M., & Walsh, N. W. (2012). San Diego and San Jose lead way in pension cuts. New York Times (June 6). Google Scholar
  17. Cowen, T., & Parfit, D. (1992). Against the social discount rate. In P. Lasett & J. S. Fishkin (Eds.), Justice between age groups and generations (pp. 144–161). New Haven: Yale University Press. Google Scholar
  18. Daly, G. G. (1969). The burden of the debt and future generations in local finance. Southern Economic Journal, 36, 44–51. CrossRefGoogle Scholar
  19. Ehrenberg, R. G., & Schwarz, J. L. (1983). Public sector labor markets. NBER Working Paper No. 1179. Google Scholar
  20. Eichenberger, R., & Stadelmann, D. (2010). How federalism protects future generations from today’s public debts. Review of Law and Economics, 6, 395–420. CrossRefGoogle Scholar
  21. GAO (2005). Social security: coverage of public employees and implications for reform. GAO-06-786T (June 9). Washington: Government Accountability Office. Google Scholar
  22. Hirsch, B. T., & Macpherson, D. A. (2010). The union membership and coverage database. Google Scholar
  23. Laing, J. R. (2010). The $2 trillion dollar hole. Barron’s (March 15), 40–43. Google Scholar
  24. Mitchell, O. S., & Smith, R. S. (1994). Pension funding in the public sector. The Review of Economics and Statistics, 76, 278–290. CrossRefGoogle Scholar
  25. Monahan, A. B. (2010). Public pension plan reform: the legal framework. Education Finance and Policy, 5. Minnesota Legal Studies Research No. 10-13. Google Scholar
  26. Monahan, A. B. (2012). Statutes as contracts? The ‘California Rule’ and its impact on public pension reform. Iowa Law Review, 97, 1029–1083. Google Scholar
  27. Moody’s Investor Services (2010). State debt medians report. New York: Moody’s Investor Services. Google Scholar
  28. Mumy, G. E. (1978). The economics of local government pension and pension funding. Journal of Political Economy, 86, 517–527. CrossRefGoogle Scholar
  29. Munnell, A. H., Calabrese, T., Monk, A., & Aubry, J. P. (2010). Pension obligation bonds: financial crisis exposes risks. State and Local Plans Issue in Brief 9, Chestnut Hill: Center for Retirement Research at Boston College. Google Scholar
  30. Munnell, A. H., Aubry, J. P., & Quinby, L. (2011a). Public pension funding in practice. Journal of Pension Economics and Finance, 10, 247–268. CrossRefGoogle Scholar
  31. Munnell, A. H., Aubry, J. P., Hurwitz, J., & Quinby, L. (2011b). How would GASB proposals affect state and local pension reporting. State and Local Plans Issue Brief 23, Chestnut Hill: Center for Retirement Research at Boston College. Google Scholar
  32. Novy-Marx, R., & Rauh, J. D. (2009). The liabilities and risks of state-sponsored pension plans. The Journal of Economic Perspectives, 23, 191–220. CrossRefGoogle Scholar
  33. Novy-Marx, R., & Rauh, J. D. (2011). Public pension promises: how big are they and what are they worth? Journal of Finance, 66, 1211–1249. CrossRefGoogle Scholar
  34. Peltzman, S. (1976). Toward a more general theory of regulation. Journal of Law and Economics, 19, 211–240. CrossRefGoogle Scholar
  35. Public Pension Database (2010). Center for Retirement Research at Boston College and Center for State and Local Government Excellence. Google Scholar
  36. Reuters (2012). U.S. public pension funding dips on market volatility. Reuters (June 11). Google Scholar
  37. Russ, H. (2012). Analysis: Stockton, California new paradigm for struggling cities. Reuters (July 1). Google Scholar
  38. Schieber, S. J. (2012). Public pension promises: the good, the bad, and the ugly (Chap. 20). In The predictable surprise. Oxford: Oxford University Press. CrossRefGoogle Scholar
  39. Splinter, D. (2011). State pension contributions and fiscal stress. Working Paper. Google Scholar
  40. Steffen, K. (2001). State employee pension plans. In E. C. Hustead & O. S. Mitchell (Eds.), Pensions in the public sector. Philadelphia: University of Pennsylvania Press. Google Scholar
  41. Stigler, G. J. (1971). The theory of economic regulation. Bell Journal of Economics and Management Science, 2, 3–21. CrossRefGoogle Scholar
  42. Summers, A. B. (2010). How California’s public pension system broke (and how to fix it). Reason (June). Google Scholar
  43. The Economist (2010a). Three-trillion-dollar-hole. The Economist (October 16), 18. Google Scholar
  44. The Economist (2010b). A gold-plated burden. The Economist (October 16), 95–96. Google Scholar
  45. The Economist (2011). A trillion here, $500 billion there. The Economist (October 15), 84. Google Scholar
  46. The Economist (2012). Burning fast. The Economist (June 23), 34. Google Scholar
  47. Thompson, E. A. (1967). Debt instruments in macroeconomic and capital theory. American Economic Review, 67, 1196–1210. Google Scholar
  48. Whitney, M. (forthcoming). Downgraded: why the next economic crisis will be local. New York: Penguin. ISBN: 9781591845706. Link:,,9781591845706,00.html?strSrchSql=Meredith+Whitney/Untitled_Meredith_Whitney.
  49. Wilshire Consulting (2011). 2011 Wilshire report on state retirement systems: funding levels and asset allocation. Santa Monica: Wilshire Associates Incorporated. Google Scholar
  50. Wilshire Consulting (2012). 2012 report on state retirement systems: funding levels and asset allocation. Santa Monica: Wilshire Associates Incorporated. Google Scholar

Copyright information

© Springer Science+Business Media New York 2012

Authors and Affiliations

  1. 1.Department of EconomicsWest Virginia UniversityMorgantownUSA

Personalised recommendations