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 1
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
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
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. 4
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
Opponent of public pensions seem to have little or no understanding of public pension funding 6
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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
Figure 2. Funding Status of 299 State Pension Plans, 2015 Unfunded $0.97 T Funded $3.12 T 9
120.00 Figure 3. Funding Levels of Public Pensions 2007 2016 100.00 80.00 Funding Levels % 60.00 40.00 20.00 0.00 1 2 3 4 5 6 7 8 9 10 10
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. 11
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 Size of Total Economy Economic Damage in 2025 due to Dismantling of Pensions (Reduction in Size of Economy) Rate of Economic Growth of Pensions in 2025 State (%) (%) (in billions of dollars) (in billions of dollars) United States 4.00 3.29 19,200 3,386.88 Alabama 2.70 2.46 218 19.236 Alaska 7.65 6.96 55 4.99 Arizona 4.60 3.71 307 59.13 Arkansas 1.90 1.78 142 9.20 California 5.02 3.05 2720 1,067.33 Colorado 4.51 4.27 350 18.27 Connecticut 2.62 2.40 299 24.81 Delaware 2.11 1.92 51 4.59 Florida 1.98 1.64 1,040 179.71 Georgia 5.00 4.17 486 80.48 Hawaii 4.50 4.44 85 1.07 Idaho 0.80 0.95 78 14.32 Illinois 6.75 5.97 760 87.55 Indiana 4.00 3.86 341 11.66 Iowa 6.30 5.64 180 18.79 Kansas 2.10 1.87 180 19.76 Kentucky 1.40 1.49 208 13.85 Louisiana 5.70 4.64 234 43.38 Maine 1.76 1.43 66 12.35 Maryland 2.80 2.37 410 63.47 Massachusetts 4.20 3.32 514 108.25 Michigan 4.90 4.13 490 76.73 Minnesota 3.15 2.70 346 49.82 Mississippi 3.50 3.46 127 1.60 12
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 13
Thank You 14