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‘Dismantling’ Public Pensions Could Cost Economy $3.3 Trillion

A NCPERS study found the push to replace pensions with defined contribution plans may hurt economic growth by 2025.

  • Sheila Dang

The “dismantling” of public pension funds by policymakers who push defined contribution plans as a replacement could set off severe effects for the economy, including lower growth and greater income inequality.

That’s the conclusion from a new study by the National Conference on Public Employee Retirement Systems, a trade association representing more than 500 U.S. and Canadian funds, which estimates the economy “will suffer severe setbacks” by 2025 if defined benefit public pensions are dismantled at its current pace. 

Based on its 2015 analysis of data, NCPERS estimates that if pensions continue to be replaced with defined contribution plans, total personal income in the U.S. could decline by $3.3 trillion by 2025, while national economic growth, currently predicted at 4 percent by the Congressional Budget Office, could be dragged down to 3.29 percent in 2025.

“Opponents, having little or no understanding of how public pensions are funded, promote misleading information about rate-of-return assumptions and huge unfunded liabilities to convince policymakers to dismantle public pensions,” NCPERS said in the report. “Some states are taking actions that are chipping away at public pensions without realizing the economic damage their actions will inflict on their states and our country’s economic future.”

Spending by retirees stimulates local economies, and pension funds are important long-term investors who stabilize the markets, underscoring the importance of pension systems in the economy, according to NCPERS. Yet, much of the criticism of public pensions is based on a faulty understanding of how they are funded, said Michael Kahn, NCPERS’ director of research, who presented the study at the group’s annual conference this week in Florida.

“Opponents of public pensions tend to whip up fear by arguing that cities and states can’t cover their long-term pension liabilities with current revenues,” Kahn said in a statement accompanying the study. “That’s like saying your 30-year mortgage is in trouble if you can’t pay it off from this year’s salary.”

NCPERS looked at how public pensions are currently funded, finding that 76 percent of money coming into pensions in 2014 were from investment earnings, up from just 22 percent in 1940. Its own survey of state and local pensions found that average funding levels have been improving since 2014, with the data showing that the majority of professionally managed public pension systems are adequately funded, Hank Kim, NCPERS’ executive director, said in the statement.

Several major U.S. cities have found ways to increase funding for their pensions when needed without dismantling them, according to the report. For example, Philadelphia said in 2009 that it was increasing its sales tax by 1 percent for five years to help increase city pension payments. The City of Portland, Oregon authorized a special property tax levy to generate the money required for its Fire & Police Disability, Retirement & Death Benefit Plan.

Dismantling pensions in a state increases its income inequality by 15 percent, leading to slower economic growth, NCPERS found.

“This relationship holds even when other factors contributing to income inequality, such as lack of investment in education, are taken into account,” the trade association said in its report.