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January 07, 2019

Study Finds Public Pensions Power the Economy

Public pension funds contributed a net $137.3 billion to state and local government coffers during 2016, underscoring their power to strengthen the U.S. economy, according to an analysis by the National Conference on Public Employee Retirement Systems (NCPERS).

NCPERS outlined the findings in its study, “Unintended Consequences: How Scaling Back Public Pensions Puts Government Revenues at Risk.” The analysis of how investment and spending connected to pension funds impact state and local economies drew on historical data from public sources including the U.S. Census Bureau, Bureau of Economic Analysis, and Bureau of Labor Statistics.

“Our findings are a powerful rebuke to the popular argument that taxpayers cannot afford public pensions,” said Michael Kahn, NCPERS’s research director and author of the study. “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,” he said.

The NCPERS study is a comprehensive exploration of how state economies and tax revenues are affected when pension funds invest their assets, and how taxpayer contributions compare to revenues, said Hank H. Kim, executive director and counsel of NCPERS.

“Critics of public pensions often hang their arguments on distorted assumptions and apples-to-oranges comparisons,” Kim said. The most common misconception is that pensions may fall short if benefits aren’t funded in full up front, Kim said. But, he noted, pension funds actually work by accumulating assets over a worker’s lifetime. 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. “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 a break from fulfilling their own obligations.”

NCPERS’s deep-dive into the data also showed:

• The economy grows by $1,088 for each $1,000 of pension fund assets. The size of pension fund assets—$3.7 trillion in 2016—means that the impact of this growth is greatly magnified.
• The economic and revenue impact of pension assets in high-population states like California, Florida, New York, and Texas are particularly significant.
• The impact of investment of assets plus spending of pension checks by retirees in 2016 yielded a $1.3 trillion contribution to the economy and $277.6 billion to state and local revenues.
• Also during 2016, taxpayer contributions to state and local pension plans in the same year totaled $140.3 billion. Thus, pension funds generated $137.3 billion more in revenues than taxpayers contributed.