SWEAT THE SMALL STUFF: STRATEGIC SELECTION OF PENSION POLICIES USED TO DEFER REQUIRED CONTRIBUTIONS

Jeffrey Diebold, Vincent Reitano and Bruce McDonald

Contemporary Economic Policy, 2018, vol. 36, issue 3, 505-525

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)

Date: 2018
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