Pension Debt is NOT a Good Deal for Anyone

The latest brief from the National Conference on Public Employee Retirement Systems (NCPERS) claims that public pensions are a good deal for taxpayers. By cherry-picking a handful of spun tales and unsubstantiated theories, and by ignoring pension debt realities, the paper proves nothing more than its authors have a creative imagination. It does demonstrate how the pension industry lives in a world of optimistic assumptions and rosy scenarios only loosely connected to the taxpayers who have to pay skyrocketing retirement costs with real dollars.

In short, NCPERS premises are wrong and here’s why.

Pension funds are resilient, well-managed and have stood the test of time, according to the brief. We are certain pensioners in Detroit, Central Falls, RI, Loyalton, Calif., Prichard, Ala., and Puerto Rico, among others, would disagree. These pension funds were neither resilient nor well-managed, and certainly did not stand the test of time—and pensioners are paying the price with drastically reduced or terminated benefits.

Unfortunately, these examples are not one-offs, but instead a growing trend of mismanaged, underfunded, failing pension systems across the country.  One only has to look at CalPERS’ 18 years of failure—from a $32.9 billion surplus in 1999 to more than $111 billion debt at present—to know that U.S. pensions are not resilient and well-managed. But if that’s not enough proof, take into account the mess of Illinois’ $100 billion-plus unfunded pension liability, Connecticut’s $68 billion pension debt and New Jersey’s $49 billion debt-ridden system, which leads us to NCPERS’ next fanciful theory…

Pension funds pose little burden, if any, on taxpayers.  One word (ok, maybe two): Crowd-Out. When governments carry billions of dollars in pension debt, how can taxpayers not be negatively impacted? Again, let’s look at New Jersey, who’s Governor Christie recently proposed cutting critical funding from such important programs as higher education, homes for disabled soldiers, psychiatric hospitals and developmental disability centers, to instead put toward the state’s pension debt. Further, in Chicago, 89 cents out of every new tax dollar since 2009 has gone to pay pensions, leaving only 11 cents out of every dollar for the rest of education. And when crowd-out just doesn’t do the trick, governments raise taxes. On top of Chicago’s reduced funding for education, the city will implement a 10 percent property tax hike this year. And let’s not forget the nearly 1,500 Chicago teachers and school staff who were laid off several years ago due to the school system’s escalating pension debt.

We also take issue with NCPERS graph on the composition of income, as it is patently misleading. The chart, which shows employer contributions declining, is only accurate if you disregard employer contributions related to debt and interest. It appears the authors are using this graph to imply that employer contributions have dropped by greater than 50 percent from 2000 to 2014, when, in fact, every plan that we have ever looked at has shown that employer contributions over that time have tripled, quadrupled, or even more. Here are a few examples of increasing employer contributions: Chicago Public Schools (Fig. 2), CalPERS and nationally (Fig. 4). When employer contributions have tripled in the last decade or so and cities are putting more than 20 percent of their budgets into pension plans, that is an enormous burden on taxpayers.

NCPERS’ last theory is this: Taxpayers’ contributions are fully or partially offset by the tax revenues generated by public pension investments in the community and by the local spending of retirees who receive pension checks. This is purely speculation and obfuscation and ridiculous on its face. The fact that taxpayer funds are partially offset is meaningless. Moreover, it’s unsubstantiated. The paper’s authors even claim, “There is little or no research focused narrowly on whether tax revenues generated through pension fund investments and spending of retiree pension checks in local economies is enough to pay the taxpayer portion of pension contributions.”  Further, while we may disagree on the economic impact multiplier for defined benefit pension benefits, there is no evidence to suggest that retirees would choose to spend their money any differently if the benefit was provided via a defined contribution plan, hybrid or cash balance plan, which provides retirement benefits with much less risk to taxpayers.

U.S. pension systems are an estimated $5 trillion in debt. Such debt is NOT a good deal for the economy. It’s certainly NOT a good deal for taxpayers, who are losing out on critical government services, while continually paying more taxes. And it is definitely NOT a good deal for public employees and retirees whose very financial futures are at risk.