PENSION UNDERFUNDING AND LIBERAL RETIREMENT BENEFITS AMONG STATE AND LOCAL-GOVERNMENT WORKERS

This paper finds evidence that the relative generosity of pensions amo ng state and local government workers is related to the ability to und erfund public employee retirement plans. Since underfunding can reduce tax burdens for residents who expect to leave the community before re tirement benefits are paid, governments have an incentive to offer emp loyees generous, poorly funded pensions. Combining individual-level da ta from the Current Population Survey (CPS) with state-level pension p lan provisions, a recursive system of equations characterizing pension underfunding levels and pension benefits is estimated The results ind icate a strong, positive relationship among underfunding levels, indiv idual pension wealth, and taxpayer mobility.