Working Paper: NBER ID: w22321
Authors: Jeffrey Brinkman; Daniele Coen-Pirani; Holger Sieg
Abstract: This paper analyzes the determinants of underfunding of local government's pension funds using a politico-economic overlapping generations model. We show that a binding downpayment constraint in the housing market dampens capitalization of future taxes into current land prices. Thus, a local government's pension funding policy matters for land prices and the utility of young households. Underfunding arises in equilibrium if the pension funding policy is set by the old generation. Young households instead favor a policy of full funding. Empirical results based on cross-city comparisons in the magnitude of unfunded liabilities are consistent with the predictions of the model.
Keywords: Municipal pensions; Underfunding; Political economy; Intergenerational conflict
JEL Codes: E6; H3; H7; R5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| binding downpayment constraint (D10) | dampens capitalization of future taxes into current land prices (R52) |
| old generation sets pension funding policy (H55) | underfunding (H72) |
| underfunding (H72) | negatively affects young households' utility (D11) |
| underfunding pensions (H55) | increases price young agents are willing to pay for land (Q15) |
| increased price young agents are willing to pay for land (Q15) | benefits old generation of landowners (Q15) |
| young agents prefer full funding (L85) | intergenerational conflict arises (D74) |
| higher fraction of young homeowners (R21) | lower unfunded liabilities (H69) |
| young homeowners' political clout (R21) | pension funding levels (H55) |
| inelastic housing supply (R31) | negative correlation with pension funding levels (G23) |
| elastic housing supply (R31) | positive correlation with pension funding levels (G23) |