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Michael Kahn, Director of
Research at NCPERS. |
“Public pensions are under constant attack,” says Michael
Kahn, the report’s author and director of research at NCPERS. “Dismantling
includes reduction of benefits, moves to replace the plans with do-it-yourself
401(k)-like defined contribution plans and switching to hybrid plans.”
Kahn’s study, “
Economic Loss: The Hidden Cost of PrevailingPension Reforms,” examines the economic impact the undoing of defined-benefit
public pension, or DB, plans would have in the United States within eight
years. The U.S. would face a $3 trillion economic loss, according to the study.
The report’s projections are based on pension reform trends Kahn tracked during
the last 10 to 15 years.
Texas would be especially hit by so-called public pension
“reforms.” It would take the fourth largest economic hit among all 50 states.
California would see a more than $1 trillion financial hit, followed by New
York with a $290 billion loss, and Florida with a nearly $180 billion setback
to its economy.
“Opponents, having little or no understanding of how public
pensions are funded, promote misleading information about rate-of-return
assumptions and huge unfunded liabilities to convince policymakers to dismantle
public pensions,” Kahn wrote in his research paper’s executive summary. “Some
states are taking actions that are chipping away at public pensions without
realizing the economic damage their actions will inflict on their states and
our country’s economic future.”
During Texas’ recent legislative session, law makers
attempted to interpret under-funding issues among public pensions in the cities
of Houston and Dallas as statewide problems. Bills were filed to try and do
away with a state and local checks-and-balance system to ensure actuarial
soundness of plans, to require local municipalities to seek voter approval for
pension obligation bonds, and to switch certain defined-benefit plans to
defined-contribution schemes that would place the burden of investing on public
workers.
Among the bills proposed during the recent legislative
session,
Senate Bill 1752 sought to move the Employees Retirement System of
Texas and the Teacher Retirement System of Texas to defined-contribution or
hybrid plans. Sen. Paul Bettencourt, R-Houston, a proponent of defined
contribution plans, wrote the bill. Despite his efforts to dismantle the public
pensions of the two retirement groups, his bill failed to receive a hearing by
the Senate’s State Affairs committee.
Even though most attempts to change defined-benefit plans in
Texas failed to gain traction this year, DC proponents are already prepping for
renewed attacks during the state’s next legislative session in 2019. Kahn says
policy makers need to understand how public pensions are funded, the economic
damage that will occur in 2025 if the dismantling of DB plans continue, and
what can be done to address funding issues without further erosion of
defined-benefit public pensions.
“A great deal of criticism of public pensions is based on a
faulty understanding of how long-term liabilities are funded,” Kahn says.
In his report, he writes: opponents of DB plans “tend to
whip up fear by arguing that cities and states can’t cover their long-term
pension liabilities with current revenues. That’s like saying your 30-year
mortgage is in trouble if you can’t pay it off from the year’s salary.”
According to his research report, opponents of DB plans are
applying rules to public-sector pensions, such as rate-of-return assumptions,
that are designed for private-sector pensions. And, findings indicate that
public pensions are not in as bad a shape as opponents claim.
According to Kahn’s research, 76 percent of the money
flowing into public pensions is coming from investment earnings. The figure in
1940, the heyday of public pensions, was 22 percent. And data shows that
average funding levels are steadily moving up since 2014.
If defined-benefit plans continue to be undone, an estimated
$19 trillion in total personal income in the U.S. would be reduced by $3.3
trillion in eight years, according to NCPERS’ new economic impact study. The
study also projects the 4 percent rate of national economic growth would
decline to 3.29 percent.
Adverse changes to DB plans also would result in an increase
in income inequality by an average of 15 percent over 10 years, says Kahn.
That, he adds, undermines the rate of economic growth by about 18 percent.
“Spending by retirees stimulates local economies, and
pension assets are a major source of capital for businesses, locally and
nationally,” Kahn says.
Pensions generate tax revenue at the local, state and
national levels and are derived from two sources: Taxes paid by beneficiaries
directly on their pension benefits and taxes resulting from expenditures made
from pension benefits after income taxes are deducted. That would include sales
taxes from a retail purchase.
In 2014, $519.7 billion in pension benefits were paid to 24
million Americans, according to the
National Institute on Retirement Security,
a nonprofit research, and education organization. The total economic output
attributed to pension benefit expenditures in the U.S. that year was $1.2
trillion. In Texas, according to NIRS, public pensioners spent $22 billion and
paid $3.5 billion in federal, state and local taxes.
Kahn and other economic researchers say cuts to pensions are
usually greater than the pensions’ positive impact. The negative impact of
pension cuts is realized in the economy dollar for dollar and is multiplied
several times over as it ripples throughout the entire economy, Kahn explains.
Because recipients may spend only a portion of their checks in local economies,
the full picture of the positive influence of pensions on the economy may not
be fully understood.
In addition to spending by public pensioners, Kahn says
pension systems invest in the world’s economy. The U.S. mortgage market, its
private equity and high-tech industries as well as many start-up companies rely
on pension funds as a source of capital.
Kahn says there are several strategies to fund public
pensions without dismantling them, and some states are already exploring and
implementing them. According to his report, the best way to adequately fund
public pensions is through progressive tax reforms. There are, however, other
measures that can be put in place to ebb the dismantling of public pensions.
The report suggests:
- Utilizing asset
monetization and dedicated revenue sources, such as parking or limited sales
taxes
- Seeking
well-designed pension obligation bonds
- Reformation of
income systems
- Closing of
wasteful tax loopholes
- Management of
risks in economic ups and downs
- Stabilizing funds
and economies of scale
Kahn says these aren’t perfect solutions, but
they are much better alternatives to dismantling DB plans
