In a new paper on the law and politics of public pensions, Amy B. Monahan at University of Minnesota offers an in-depth analysis of the political incentives behind pension funding and how even explicit constitutional funding requirements fail to discipline public pension plans. The major reason why so many governments fail to properly fund public pensions comes straight from Public Choice 101: politicians are not benevolent and altruistic, but self-interested people who care more about getting votes in short-term horizons than doing the right thing. This incentive structure encourages allocating scarce budgetary dollars towards current constituents and away from long-term obligations such as pensions. Since pension debt is not reflected on the balance sheet, pension underfunding is an attractive means of off-balance-sheet borrowing to politicians.
The paper looks at eight states that have constitutional funding requirements for public pensions and finds that these states overall are not superior to the national average in terms of funding discipline and methodology. One reason is because these requirements rely on the ambiguous “actuarially sound” standard. Another problem is enforcement, often hindered by three main hurdles:
- Lack of standing: pension participants cannot prove they are harmed by the underfunding,
- Inability of courts to force pension allocations against legislative will,
- Lack of monies available to be directed.
Solutions proposed by the paper include:
- Amendments to state constitutions: giving specific instructions regarding how to calculate the required funding amount, making funding requirements self-executing, providing legal standing for plan participants, and giving courts the requisite authority to address pension underfunding,
- Anti-abuse measures,
- Abandonment of the defined benefit system.