Public Corruption and Pension Underfunding in the American States

Abstract

Unfunded public pension obligations represent a great challenge for policy makers in the American states. We posit that a part of pension underfunding relates to the level of public corruption. Empirical findings in the article show that funding ratios in public pension funds are inversely related to the incidence levels of corruption in the state, with other fiscal, political, and institutional covariates held constant. We show that this can happen through higher pension benefits, lower actuarially required contributions (ARCs), lower percentage of actual ARC contributions, and poorer investment outcomes. Based on empirical estimates, we find that a reduction of corruption by one standard deviation around the mean would permit the states to save on pension benefits by 10.24% annually (or US$1,894.64 per recipient), increase required ARC by 4.40%, increase actual ARC contributions by 8.46%, and improve investment returns by 4.72%. Therefore, policies to reduce public-sector corruption, or to improve the insulation of pension funds in relatively more corrupt environments, can make a significant contribution toward tackling the public pension underfunding crisis in the American states.

Fiscal competition and state pension reforms

“…More importantly, a number of studies have raised the concern that public unions behave like interest groups and influence the political and budgeting process to increase the size of public sector and public expenditures to gain (economic) rents in the form of higher compensation, particularly benefits (Anzia & Moe, 2015; Courant et al, 1980; Liu et al, 2021; Mehay & Gonzalez, 1986; Tullock, 1974). Interstate migration—or the ability of taxpayers to vote with their feet—put constraints on the ability of public‐sector unions to extract economic rents for their members because residents who are unhappy with the level of public services/taxation can move elsewhere, reducing taxable population, and the government's ability to pay higher public sector wages (Brueckner & Neumark, 2014; Courant et al, 1979; Freeman, 1986).…”

The Effects of Organizational Scandals on the Desirability of Public Organizations as Places to Work: Evidence From the VA Waitlist Scandal

“…The first line of research focuses on inside stories to investigate the main causes of organizational scandals (e.g., Eikenberry et al, 2007;Molina, 2018;Mujkic & Klingner, 2019;Nelson & Afonso, 2019;Patrick et al, 2018;Schneider, 2005). The second line of literature explores the effects of scandals on trust in government and government officials (Bowler & Karp, 2004;Solé-Ollé & Sorribas-Navarro, 2018;Wang, 2016;Zhang & Kim, 2018), government reform (Bozeman & Anderson, 2016;Grimmelikhuijsen & Snijders, 2016;Rauh, 2016), and public financing (Liu & Mikesell, 2019;Liu et al, 2021;Liu et al, 2017). However, despite the attention paid to the external effects of organizational scandals, research on the impact of scandals on government employees has gone virtually unexplored.…”

Top-Down Accountability, Social Unrest, and Anticorruption in China

“…Endemic corruption not only plagues the public sector (e.g., Anderson & Tverdova, 2003; Liu & Mikesell, 2014, 2019; Liu et al, 2017, 2021; Rose-Ackerman, 1999), but also has pernicious economic and social repercussions (e.g., Mauro, 1995; Villoria et al, 2013; Zhang & Kim, 2018; Zhu et al, 2019). Desiring clean governments and good governance, policy makers, academics, and the general public are all searching for effective policies to combat corruption (for a review, see Gans-Morse et al, 2018).…”