Cutting Public Pension Benefits Would Hurt the Economy

In its latest installment of ongoing research on the impact of public pensions on the U.S. economy, the National Conference on Public Employee Retirement Systems (NCPERS) set out to quantify the risk that reducing or even dismantling public pension benefits will ultimately backfire.

In its study, “Unintended Consequences: How Scaling Back Public Pensions Puts Government Revenues at Risk,” NCPERS found the economy grows by $1,088 for each $1,000 of pension fund assets. While the figure sounds small on the surface, 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. However, economies and revenues of even some small states benefit significantly from investment of their pension fund assets. 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.

While some funding of public pensions come from taxpayers, it should be understood that it is part of the compensation of workers providing public services, the report says. “If these services were privatized, they would cost taxpayers more. The goal of private companies is to make profit. The goal of a public service is to ensure the public good,” the research report states.

“Our findings are a powerful rebuke to the popular argument that taxpayers cannot afford public pensions,” says 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.” Kahn noted that the study also found that in 38 states, pensions are net contributors to revenue.

“Pensions are a long-term investment, and it’s a mistake to evaluate them through the lens of short-term political expediency,” says Hank H. Kim, executive director and counsel of NCPERS. “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.” He noted that employer and employee contributions plus investment returns contribute steadily to public pension funds’ growth.