National Conference on Public Employee Retirement Systems
Economic Consequences of Prevailing Pension reforms
How much damage would they cause to our economic future? Michael Kahn, Ph.D.
Director of Research
National Conference on Public Employee Retirement Systems
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National Conference on Public Employee Retirement Systems
Overview
• Pension funds provide great stimulus to the economy
• But when we undermine pensions, the economy suffers.
• We must understand how pensions are funded.
• We need to recognize the economic consequences of dismantling pensions.
• We must explore ways to address pension funding issues without dismantling them. 2
National Conference on Public Employee Retirement Systems
Pension funds provide great stimulus to the economy
• Spending by retirees stimulates local economies, and pension assets are an important source of capital for businesses.
• A recent study by The PFM Group suggests that spending by retirees accounts for 5.3% of our gross national product. • A recent study by NIRS shows that defined‐benefit (DB) pension plans stimulate $1.2 trillion in economic output. • Pension funds are also great stabilizers of our economy. 3
National Conference on Public Employee Retirement Systems
But when we undermine pensions, the economy suffers
•Unfortunately, we have been steadily dismantling pensions, cutting benefits, increasing employee contributions, and converting DB plans into DC or some kind of combo plans.
•Our analysis of empirical data from the 1980s, 1990s, and 2000’s shows that when pension funds are dismantled in this fashion, economic inequities rise which in turn drag the economy down. •Dismantling pensions also increases economic instability. Robert Shiller, Nobel Laureate in Economics, argues that shift from DB to DC plans is one of the reason that gave rise to asset bubbles. When bubbles pop, everyone suffers.
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National Conference on Public Employee Retirement Systems
We expect that negative impact of pension cuts on the economy will be greater than the positive impact pensions now have on the economy. 5
National Conference on Public Employee Retirement Systems
Opponent of public pensions seem to have little or no understanding of public pension funding
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National Conference on Public Employee Retirement Systems
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National Conference on Public Employee Retirement Systems
Opponents of public pensions apply private sector rate of return rules to public sector pensions and come up with huge numbers. They then compare 30‐year unfunded liability numbers with one year revenues to make their case for dismantling public pensions. Whereas private companies may and do go out of business, states are here to stay. Does anyone believe that state of Texas for example will go out of business and sold to a foreign nation?
Public pensions are in a better shape than portrayed by their opponents 8
National Conference on Public Employee Retirement Systems
Figure 2. Funding Status of 299 State Pension
Plans, 2015
Unfunded
$0.97 T
Funded
$3.12 T
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National Conference on Public Employee Retirement Systems
Figure 3. Funding Levels of Public Pensions 2007‐2016 120.00
100.00
Funding Levels % 80.00
60.00
40.00
20.00
0.00
1
2
3
4
5
6
7
8
9
10
10
National Conference on Public Employee Retirement Systems
Opponents of public pensions have no clue how much damage it will inflict on the economy in 2025 if dismantling of public pensions continues. If we continue to dismantle public pensions, we’ll inflict $3.3 trillion damage to our economy in 2025.
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National Conference on Public Employee Retirement Systems
Estimates of Reduction in Rate of Economic Growth and Size of Economy in 2025
if the Dismantling of Public Pensions Continues
Rate of Economic
Growth
with Continued Dismantling
of Pensions
(%)
Rate of Economic
Growth
State
United States
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
(%)
4.00
2.70
7.65
4.60
1.90
5.02
4.51
2.62
2.11
1.98
5.00
4.50
‐0.80
6.75
4.00
6.30
2.10
‐1.40
5.70
1.76
2.80
4.20
4.90
3.15
3.50
3.29
2.46
6.96
3.71
1.78
3.05
4.27
2.40
1.92
1.64
4.17
4.44
‐0.95
5.97
3.86
5.64
1.87
‐1.49
4.64
1.43
2.37
3.32
4.13
2.70
3.46
Size of
Total
Economy
in 2025
(in billions of dollars)
19,200
218
55
307
142
2720
350
299
51
1,040
486
85
78
760
341
180
180
208
234
66
410
514
490
346
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Economic Damage
in 2025
due to Dismantling of
Pensions (Reduction in Size of Economy)
(in billions of dollars)
3,386.88
19.236
4.99
59.13
9.20
1,067.33
18.27
24.81
4.59
179.71
80.48
1.07
14.32
87.55
11.66
18.79
19.76
13.85
43.38
12.35
63.47
108.25
76.73
49.82
1.60
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National Conference on Public Employee Retirement Systems
We must explore ways to address pension funding issues without dismantling them. •Asset monetization and dedicated revenue sources
•Well‐designed pension obligation bonds
•Reform of revenue systems
•Closing of wasteful tax loopholes •Management of risks in economic ups and downs •Other options, including stabilization funds and economies of scale
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National Conference on Public Employee Retirement Systems
Thank You
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