Pensions boost economy, generate revenue
Updated study warns, ‘Taxpayers cannot afford continued assaults on public pensions’
Pensions to firefighters, like the Hampshire Fire Department, benefit the economy through their overall investments as well as their direct payments to retirees. (Flickr)
By Ted Cox
Public pensions not only boost the economy through payments to retirees, but generate revenue through their large-scale investment, according to a new study from the National Conference on Public Employee Retirement Systems.
The new study released this year updates data from an original study released in 2018 and finds that the impact pensions have is even more robust now than was determined two years ago.
“Unintended Consequences: How Scaling Back Public Pensions Puts Government Revenues at Risk” finds that “the positive impacts of public pensions on the economy and revenues became more pronounced between 2016 and 2018.” It states: “Overall, when we add the impact of investment of assets and spending of pension checks by retirees, public pensions in 2018 contributed $1.7 trillion to the US economy and $341.4 billion to state and local tax revenues.” That compares with $1.3 trillion contributed to the economy and $277.6 billion generated in state and local revenues just two years before.
“It is common sense that consumer spending and investment fuel the economy, which in turn expands tax revenues,” the study states. “Previous research has shown that pension beneficiaries bolster the economy by feeding resources back into the local communities where they live and spend their pension checks.”
The National Institute on Retirement Security published a study earlier this year on “Fortifying Main Street: The Economic Benefit of Public Pension Dollars on Rural America.” It found that public pensions have a profound effect on rural communities, as workers providing essential community services like teachers, firefighters, and police officers make up a larger percentage of the population in those areas, and their retirement payments are one of the most reliable sources of income, spurring the local economy — especially in areas slow to recover from the Great Recession a decade ago.
“However, research on how state economies and tax revenues grow when pension funds invest their assets is very limited,” the study added. “Our research fills this gap. We examine the broader question of state and local revenues generated by public pensions, and whether these revenues exceed taxpayer contributions to the pensions. We hypothesize that the joint impact of spending of retirement checks and investment of pension-fund assets exceeds taxpayer pension contributions in most states.”
That, in fact, turns out to be the case in 40 states, including Illinois.
“We found that the economy grows by $1,362 with the investment of each $1,000 of pension fund assets,” the study determines. “This amount may seem small, but due to the size of the pension fund assets, $4.3 trillion in 2018, the effect on the economy and revenues is significant. The results show that investment of pension fund assets contributed $872.4 billion to the U.S. economy, which in turn yielded $178.8billion in state and local revenues in 2018. Similarly, the results show that $335.2 billion paid to retirees in pension checks during 2018 contributed $836.9 billion to the economy and $162.6 billion to state and local tax revenues.”
It added that “in 2018, pension funds generated approximately $341.4 billion in state and local revenues. The taxpayer contribution to pension plans in the same year was $162 billion. In other words, pension funds generated $179.4 billion more in revenues than taxpayers contributed to the pension funds.”
According to the study, Illinois’s $185 billion in public pension assets contributed $25 billion to the state economy through investments, raising $4.7 billion in state and local revenue. The $21 billion in pension checks paid out in 2018 wound up contributing $52.8 billion to the economy and generating $9.7 billion in revenue — again, to emphasize, much of that in communities that do not have robust economies. Combined, the $4.7 billion from investments and the $9.7 billion produced by pension checks and their impact on the economy produced $14.4 billion in revenue, more than the $12.7 billion paid by taxpayers into the funds, to the net benefit of $1.8 billion in revenue.
The study grants that “true, the pension money comes from taxpayers, but it should be understood that it is part of the compensation of workers providing public services.” It warns that “if these services were privatized, they would cost taxpayers more for the simple reason that the goal of private companies is to make profit, whereas the goal of a public service is to ensure the public good. In addition to yielding economic benefits, pensions play an important role in the recruitment and retention of a quality public workforce to ensure our collective good.”
It cites attempts to cut public pensions based on arguments that question “the lingering effects of recession, misguided budget priorities, and a regressive revenue structure” — check, check, check, where the Illinois General Assembly is concerned. “Time and again, defined-benefit pensions for firefighters, police officers, teachers, and other public servants are placed at risk, even though plan participants have consistently held up their end of the bargain” — check again with the so-called pension holidays granted during budget crunches. “Changes proposed or enacted in the name of ‘reform’ are often thinly disguised efforts to dismantle public pensions rather than reckon with correcting decades of short-sighted government decisions to withhold funding.”
The study concludes: “Our research demonstrates that public pensions have beneficial effects on state and local economies. Shutting them down would ultimately increase taxpayer burdens, and harm state and local economies and tax revenues,” adding, “The fact is that dismantling public pensions carries a grave cost. Far from easing the perceived burdens on taxpayers, pursuing this path would actually increase the burden on taxpayers by $179.4billion. Taxpayers cannot afford continued dismantling of public pensions.”
As former U.S. Labor Secretary Robert Reich said about the original study two years ago: “This is the first study of its kind that examines the impact of investment of pension fund assets and spending of pension checks by retirees on state and local economies and revenues. It shows that pension funds play an important role in our economy and are net revenue producers. If there were no public pensions, taxpayers will have to pay more to receive the same level of services. Legislators should think twice before they convert public pensions into do-it-yourself retirement plans.”