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Public Corruption and Pension Underfunding in the American States

Liu, Cheol / Mikesell, John / Moldogaziev, Tima T.

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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.

Issue Date
2021-02
Publisher
SAGE Publications
Keywords(Author)
Public Pension Underfunding; US States’ Fiscal Health; Public Corruption
DOI
10.1177/0275074021992891
Journal Title
American Review of Public Administration
ISSN
0275-0740
Language
English
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