Public pensions are a good deal for taxpayers, and dismantling them would be costly and short sighted, the National Conference on Public Employee Retirement Systems asserts in a new research report.
Critics of public pensions funds disagree, arguing that they are inadequately funded.
The report seeks to dissect arguments used by what NCPERS calls “ideological organizations” to discredit public pension funds.
It argues that underfunding levels are calculated by means of politicized processes in many states, and should be looked at askance.
“Critics often advance the false imperative that cities and states should be able to cover their long-term pension liabilities with current revenues,” NCPERs’ executive director and counsel Hank Kim said in a statement.
“But that’s not how advance funding models work, whether for public pensions or other long-term goals such as retirement or college savings.”
Kim’s colleague Michael Kahn, director of research and author of the report, gives this example. Setting up a college fund at birth for a child’s education results in an unfunded liability for many years.
Over time, however, investment income and ongoing contributions would reduce this unfunded liability — possibly to zero with proper planning, and sometimes into a surplus. “That is how pensions work,” Kahn said in the statement.
“Many factors can affect the level of unfunded liability over a period of years, but in the end, pre-funding is a winning formula that controls rather than increases risk for taxpayers.”
Dismantling pensions would harm taxpayers economically, the report says, citing NCPERs’ earlier research. By the middle of the next decade, the economic damage would amount to $3 trillion if governments continued to dismantle public pensions.
A Good Deal
The report offers several arguments in favor of public pensions.
For one, they are resilient and well managed, having stood the test of time for more than a century through economic cycles.
Using U.S. Census data, the report says pension fund assets grew between 2000 and 2016, including the impact of the 2001 and 2008 recessions. “After each recession, pension fund assets bounced back and kept growing.”
The report says that contrary to opponents’ contentions that taxpayers cannot bear the funding burden, public pensions are funded in advance over many years, with investment earnings and employee contributions generating asset growth and paying 80 cents per dollar of benefit.
Taxpayers pay the other 20 cents per dollar, and in return get public service from nurses, firefighters, teachers and public officers. Pensions serve to attract and retain these employees who generally receive lower wages on average than their private-sector counterparts.
The report says that taking into account tax revenue generated by pension spending and investment, the 20-cents-on-the-dollar tax burden is erased. “Thus, pension funds pose little, if any, burden on taxpayers because of the advantages of advance funding.”
According to the report, retirees’ spending stimulates local economies, and pension assets are a source of capital for businesses and startups. Citing data from the National Institute on Retirement Security, it says that every dollar paid in pension benefits creates $2.21 in economic output.
— Check out Americans Are Dying Younger, Saving Corporations Billions on ThinkAdvisor.