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Sweat The Small Stuff: Strategic Selection Of Pension Policies Used To Defer Required Contributions

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  • Jeffrey Diebold
  • Vincent Reitano
  • Bruce McDonald

Abstract

The administrators of state‐sponsored defined benefit public pension plans have considerable discretion to determine the accounting and actuarial parameters used to calculate the normal cost contributions and amortization payments that, together, comprise the sponsoring state's annual required contribution amount. Using longitudinal data from the Public Pension Database and a fixed effects approach, we find evidence that suggests plan administrators decisions about cost and amortization methods are influenced by the normal cost and amortization payments, respectively. When these costs increase, administrators tend to use less prudent methods that defer, or keep low, the pension contributions required from the state while, simultaneously, and perversely, improving the appearance of the plan's funded status and the state's funding discipline. (JEL H75)

Suggested Citation

  • Jeffrey Diebold & Vincent Reitano & Bruce McDonald, 2018. "Sweat The Small Stuff: Strategic Selection Of Pension Policies Used To Defer Required Contributions," Contemporary Economic Policy, Western Economic Association International, vol. 36(3), pages 505-525, July.
    • Handle: RePEc:bla:coecpo:v:36:y:2018:i:3:p:505-525
    DOI: 10.1111/coep.12236
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    References listed on IDEAS

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    Cited by:

    1. Bagchi, Sutirtha, 2019. "The effects of political competition on the generosity of public-sector pension plans," Journal of Economic Behavior & Organization, Elsevier, vol. 164(C), pages 439-468.
    2. Bagchi, Sutirtha & Naughton, James P., 2021. "Public-sector pension plans and the discount rate assumption: The role of political incentives," Economics Letters, Elsevier, vol. 204(C).

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    JEL classification:

    • H75 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Government: Health, Education, and Welfare

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