Public-Sector Pension Plans and the Discount Rate Assumption: The Role of Political Incentives

Sutirtha Bagchi and James Naughton ()
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James Naughton: Darden School of Business, University of Virginia, https://www.darden.virginia.edu/faculty-research/directory/james-naughton

No 48, Villanova School of Business Department of Economics and Statistics Working Paper Series from Villanova School of Business Department of Economics and Statistics

Abstract: We provide evidence that political pressure creates incentives for elected officials to choose higher discount rates to value defined benefit pension promises, thus artificially reducing the short-term reported cost of these benefits. We generate our inferences using a unique panel dataset for all local pension plans from the state of Pennsylvania for 2003–2013, and by comparing the differential response to the GASB requirement to lower the discount rate after the Great Recession for plans that are managed by elected officials versus those that are managed by non-elected officials (i.e., municipal authority plans). We find that appointed officials in charge of municipal authority plans decreased their discount rate by 29 basis points more than elected officials in charge of municipal plans. This difference is not attributable to plan factors or financial reporting requirements, and suggests that political pressure leads to optimistic discount rate assumptions.

Keywords: Public-sector pensions; Defined benefit pensions; Discount rate; Municipal authorities (search for similar items in EconPapers)
JEL-codes: H75 H83 M41 (search for similar items in EconPapers)
Date: 2020-12
New Economics Papers: this item is included in nep-age and nep-pol
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Journal Article: Public-sector pension plans and the discount rate assumption: The role of political incentives (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:vil:papers:48

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