Does democracy cause pension mismanagement?
Red states’ pension management records can be just as irresponsible as blue states’, to be sure. But a new paper suggests that the real threat may come from purple America. The University of Michigan’s Sutirtha Bagchi lays out a carefully quantified case that fiscal irresponsibility stems from too much political competition, not its lack.
Bagchi compares data on 2,000 local pension plans in Pennsylvania with the vote shares each political party received in these same localities, for all major state and national races held between 1980 and 2009 (President, U.S. Senator, Governor, Attorney General, Auditor General, and Treasurer). Data limitations prevented Bagchi from using local election data, although he did check the state-level results with a sample of local election data from 190 municipalities. He satisfied himself that “the measures of Democratic support across the two different data sources are strongly correlated with each other.”
But the central finding is that “a higher level of political competition is associated with a lower actuarial funded ratio and more generous benefits” as well as a “higher interest rate at which to discount future actuarial liabilities.”
Because they were at risk of actually being held accountable to voters, politicians in the more competitive communities (where the Democratic party’s vote share was closest to 50%) adopted more fiscally irresponsible practices. They increased benefits, hid costs from taxpayers by keeping their discount rates high, and lower funded ratios were the result. “[P]olitical competition…[has] a negative and statistically significant effect on the actuarial funded ratio and a positive and statistically significant effect on the size of unfunded liabilities per active member.”
Though the analysis was limited to Pennsylvania municipalities, Bagchi claims that the results hold for states as well. “Using data on 85 defined benefit public-sector pension plans from the Wisconsin Legislative Council for 1989 to 2009 and a measure of political competition, I find that as the level of political competition in a state goes up, the actuarial funded ratio of plans offered by that state declines.”
In sum, as a general principle, “political competition systematically alters the behavior of politicians when in office and induces them to make decisions that are sub-optimal for society in the long run.”
One conclusion that could be drawn from these depressing results is that the problem with blue states is that they are not blue enough. Illinois’ Democratic Governor risks losing to a Republican this fall. Republican George Pataki was New York’s governor for three terms. The threat of losing forces Democrats into unions’ hands; Republicans too, sometimes.
“Donor maintenance” is the term Kenneth Vogel uses in his recent book on campaign finance to describe the art of convincing wealthy contributors both that (a) by giving, they’re betting on a winner, but also (b) a struggle is at hand, and if they don’t give, all may be lost. It’s hard to raise money for an uncompetitive race; special interests can’t influence politicians with literally no fear of losing reelection.
As for red states, Bagchi’s findings support the conclusion that fearing to displease taxpayers with the real costs of defined benefit pensions can be as fiscally harmful as striving to please public employees. There’s plenty of evidence to support this notion that red state politicians are reluctant to embrace pension transparency.
Or maybe the lesson is simply that we can’t have both responsibly managed defined benefit pension systems and political competition. Assuming everyone prefers to keep democracy, a different model of retirement benefits would provide a solution. Bagchi himself leans in that direction: “political competition has no effect on the generosity of defined contribution plans.”