15 August 2018

Public Pensions Boost Government Revenue

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According to a new study from the National Conference on Public Employee Retirement Systems (NCSPERS), public pension funds contributed $137.3 billion to state and local governments in 2016. 

“Our findings are a powerful rebuke to the popular argument that taxpayers cannot afford public pensions,” Michael Kahn, NCPERS’s research director said in a release. “The evidence shows that if public pensions did not exist, taxpayers not only wouldn’t save money; they would have to cover a severe annual revenue shortfall.” 

The study found that pensions are net contributors to revenue in 38 states. In the other 12 states, the report said pensions were either revenue neutral, or taxpayer contributions were greatly subsidized by state and local revenues generated by public pensions.

“Due to lack of research focusing on the economic impact of public pension assets, we have developed a new model and methodology,” said the report.

NCPERS said the purpose of the model is to estimate the economic impact, as measured by personal income, of pension assets, controlling for other variables such as investment in education, infrastructure spending, multifactor productivity, and income inequality.  The analysis used historical data from public sources, including the US Census Bureau, Bureau of Economic Analysis, and Bureau of Labor Statistics.

“Critics of public pensions often hang their arguments on distorted assumptions and apples-to-oranges comparisons,” Hank Kim, executive director and counsel of NCPERS, said in a release.

Kim said the most common misconception is that pensions may fall short if benefits aren’t funded in full up front. He points out that pension funds work by accumulating assets over a worker’s lifetime, and that employer and employee contributions, plus investment returns contribute steadily to the funds’ growth.

“Pensions are a long-term investment, and it’s a mistake to evaluate them through the lens of short-term political expediency,” Kim said. “Even worse than a mistake, it is a great disservice to the hardworking public servants who have faithfully paid into their pension plans even when the governments that employ them opted to take break from fulfilling their own obligations.”

According to the report, the US economy grows by $1,088 for each $1,000 of pension fund assets, and the economic and revenue impact of pension assets in high-population states like California, Florida, New York, and Texas are particularly significant. It also found that the impact of the investment of assets, plus spending of pension checks by retirees in 2016 translated to a $1.3 trillion contribution to the economy, and $277.6 billion to state and local revenues. At the same time, taxpayer contributions to state and local pension plans in 2016 totaled $140.3 billion, indicating that pension funds generated $137.3 billion more in revenues than what was contributed by taxpayers.

NCPERS’ analysis also said the shift to defined contribution plans “increases income inequality and slows down the economy.”

The report found that the investment of pension fund assets contributed $587.5 billion to the economy, which in turn yielded $125.7 billion in state and local revenues. It also said that $303.1 billion paid to retirees in pension checks during 2016 contributed $757.8 billion to the economy and $151.9 billion to state and local revenues.

“The argument that taxpayers cannot afford public pensions has gained traction despite a woeful lack of empirical evidence to support it,” said the report. “Time and again, defined-benefit pensions for firefighters, police officers, teachers, and other public servants have ended up on the chopping block, even though plan participants have consistently held up their end of the bargain.”

Click here for the orginal article from Chief Investment Officer.

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