SWEAT THE SMALL STUFF: STRATEGIC SELECTION OF PENSION POLICIES USED TO DEFER REQUIRED CONTRIBUTIONS
Vincent Reitano and
Contemporary Economic Policy, 2018, vol. 36, issue 3, 505-525
The administrators of stateâ€ 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)
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