Study: Political Competition Leads to Fiscal Irresponsibility

August 26, 2014

Stephen Eide, senior fellow at the Manhattan Institute, reports on a new study from Sutirtha Bagchi at the University of Michigan. Bagchi sought to analyze the source of fiscal irresponsibility: is it more likely to arise in blue states or red states? In fact, Bagchi found that the places that were highly competitive at the ballot box were far more likely to have fiscally irresponsible pension plans.

According to Eide, Bagchi's report studied municipalities in Pennsylvania, taking 2,000 pension plans and comparing them with the votes that the political parties received in each locality in state and national races from 1980 to 2009.

What did he find? Communities that were more politically competitive had the least responsible pension plans; they offered high benefits with high discount rates (which clouds actual costs) and had much lower actuarial funding ratios (the ratio of assets compared to liabilities).

Bagchi concluded, "[P]olitical 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." Politicians may offer extensive pension benefits while keeping taxes low in order to curry favor with voters and public employees, for example, but this only keeps pensions underfunded.

Eide notes that the study was only one of local Pennsylvania governments. However, according to Bagchi, the results in Pennsylvania municipalities are also applicable at the state-level. When he analyzed pension plans in Wisconsin over the two decades from 1989 to 2009, Bagchi reports finding that "as the level of political competition in a state goes up, the actuarial funded ratio of plans offered by that state declines."

Source: Steve Eide, "Does democracy cause pension mismanagement?" Public Sector Inc., August 21, 2014.

 

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