By Manita Rao

The shadow of unfunded public pensions has raised concerns on its consequences for public services and public employees. Some argue that pension liabilities increase the cost of government by crowding out public services. Others suggest that unfunded pensions are more likely to affect public employees and have limited implications for public services. This article empirically examines the extent to which the impact of unfunded pensions is mitigated or has spillover effects on public services and public employees. Utilizing new data on city-sponsored pensions plans that cover over two-decades from 1997–2018, I employ a novel identification strategy to provide forward-looking causal estimates. I find that the spillover effect to public service expenditures is significant and persists even three years after the liability is incurred. The impact on public employees is mediated by union bargaining power and varies between the three groups covered in the study – firefighters, police, and general employees. Public service expenditures are responsive to returns on pension investments. Positive investment returns partially mitigate spillover to public services and salient to preserving public employees’ pension benefits. These results are important to the sustainable management of public pensions and human capital in local government.

Source: SSRN