Public sector pension plans often come under criticism for what some observers suggest is the high costs paid by taxpayers to fund generous benefits. A new report from the United States, however, suggests public sector plans actually generate revenue for governments.
The analysis by advocacy group the National Conference on Public Employee Retirement Systems found the country’s pension funds generated about US$277.6 billion in government revenues in 2016, while taxpayer contributions were US$140.3 billion. Thus, public sector plans generated US$137.3 billion more in revenues than taxpayers contributed.
“Our findings are a powerful rebuke to the popular argument that taxpayers cannot afford public pensions,” said Michael Kahn, the organization’s research director and author of the study, in a press release.
“The evidence shows that if public pensions did not exist, taxpayers not only wouldn’t save money; they would have to cover a severe annual revenue shortfall.”
The report found the investment of public sector pension assets added US$587.5 billion to the economy in 2016, yielding US$125.7 billion in state and local government revenues. As well, it found the US$303.1 billion paid to retirees in pension cheques in 2016 contributed US$757.8 billion to the economy and US$151.9 billion to state and local government revenues.
The most common misconception about public pensions is they may fall short if benefits aren’t funded in full up front, said Hank Kim, the organization’s executive director and counsel, in the release. However, he noted that as pension funds accumulate assets over a worker’s lifetime, employer and employee contributions, plus investment returns, contribute steadily to their growth.
“Pensions are a long-term investment, and it’s a mistake to evaluate them through the lens of short-term political expediency,” said Kim.
“Even worse than a mistake, it is a great disservice to the hardworking public servants who have faithfully paid into their pension plans, even when the governments that employ them opted to take break from fulfilling their own obligations.”
Measuring the U.S. economy in terms of personal income, the report found it grows by US$1,088 for each $1,000 of pension fund assets. While those numbers may seem small, the report suggested that due to the size of pension fund assets — US$3.7 trillion in 2016 — the effect on the economy and revenues is significant.
While some smaller states benefit significantly from the investment of their pension funds, the economic and revenue effect in larger jurisdictions such as California, Florida, New York and Texas is particularly noteworthy, according to the advocacy group.
Given the report’s findings, is it really true that public sector pension plans are net revenue generators for governments? Share your view in this week’s online poll.
Last week’s poll asked whether employers would embrace variable benefits from defined contribution pension plans. While the results were close, just over half (53 per cent) of respondents said the momentum towards variable benefits is picking up and having a larger jurisdiction like Ontario on board would encourage plan sponsors to take action. However, 47 per cent of respondents disagreed, saying the experience from our jurisdictions shows there’s still little interest and that barriers to widespread adoption remain.