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Unintended Consequences: DATA AND METHODOLOGY

  • By: admin
  • On: 05/29/2020 10:15:08
  • In: News
  • Comments: 0
In the second part of the Unintended Consequences: How Scaling Back Public Pensions Puts Government Revenues at Risk: 2020 Update blog series, we will discuss the study's data and methodology. First, we will review the impact pension fund assets have on state and local economies. Second, we will review the impact pension checks have on state and local economies.

Unintended Consequences: DATA AND METHODOLOGY

In the second part of the Unintended Consequences: How Scaling Back Public Pensions Puts Government Revenues at Risk: 2020 Update blog series, we will discuss the study's data and methodology. First, we will review the impact pension fund assets have on state and local economies. Second, we will review the impact pension checks have on state and local economies.

While there are studies that address the economic and revenue impact of public pensions through spending retiree pension checks, we conducted the first study on the economic and revenue impact of pension assets. We developed our methodology from scratch to study the total impact of public pensions, including pension checks plus pension assets, on the economy and revenue of all 50 states. 

Our historical analysis was performed in three steps.
  1. We estimated the impact of investment of pension fund assets on state and local economies and revenues.
  2. We estimated the impact of spending of pension checks by retirees on state and local economies and revenues.
  3. We assessed whether revenues generated by public pensions exceed taxpayer contributions to those pensions. If so, how much would taxpayers have to pay in additional taxes to maintain the current level of services in the event public pensions were dismantled?

Estimating the Impact of Pension Fund Assets on State and Local Economies and Revenues 

Pension fund assets constitute an important source of capital for start-up and existing businesses. Growth in these businesses grows jobs, income, and consumer spending, which in turn grow the economy and tax revenues. We estimate the impact of pension fund assets on state and local economies and revenues as follows: 

Using historical data, we develop a model to examine the contribution of investment of public pension fund assets to the economy at the national level, controlling for other variables that also impact the economy. We measure the economy for the purposes of this study in terms of personal income (the dependent variable in the model). The other variables used in the model include the following: 
  • Education spending on K–12 
  • Education spending on higher education 
  • Multifactor productivity 
  • Infrastructure spending 
  • Pension fund assets 
  • Income inequality 
All variables are measured in thousands of dollars except multifactor productivity and income inequality. Multifactor productivity is measured as an index and income inequality is measured as the ratio of income in the top quintile to that in the bottom quintile. 

Next, we apply the beta value for the pension assets variable in the model to the pension fund assets of each state to estimate their contribution to the state economy. The beta coefficient measures the change in the economy for a unit change in a variable used in the model. 
  • We then adjust this contribution to the state economy by considering the multiplier effect and the size of the state economy in relation to the national economy. We use the multiplier effect of 2.5 in our analysis. This figure should probably be higher, as most Americans spend 80 cents of every dollar of their income. However, we choose to use 2.5 in our analysis based on some studies cited in the literature review section. The adjustment for the size of the state economy is made by multiplying the contribution to the state economy by the ratio of the state and national economies. 
  • To convert the contribution of pension assets to the economy into state and local revenues, we use historical data to develop a model to estimate a revenue quotient for each state by examining the relationship between the economy (personal income) and state and local revenues since 1977. 
  • We apply this revenue quotient to the adjusted contribution of pension assets to the economy to estimate state and local revenues attributable to pension assets. 
 

Estimating the Impact of Pension Checks on State and Local Economies and Revenues 

The impact of spending of retirement checks on state and local economies and revenues is estimated as follows: 
  • We consider the pension payments made by state and local pension plans as a direct contribution to the economy (in the form of personal income). 
  • We then adjust this contribution to the economy by using the multiplier effect specified above. 
  • To convert this adjusted contribution to the economy into state and local revenues, we use the revenue quotient specified above. 
 

Assessing Whether Revenues Generated by Public Pensions Exceed Taxpayer Contributions to Those Pensions 

The assessment of whether revenues generated by public pensions exceed taxpayer contributions is done as follows: 
  • We estimate the total state and local revenues by adding the revenues generated through investment of pension fund assets and those generated through spending of pension checks by retirees. 
  • We then compare the total state and local revenues with taxpayer contributions to determine whether these revenues exceed taxpayer contributions. 
  • This comparison also allows us to determine how much additional revenue taxpayers would have to make up to receive the current level of services if public pensions were not there. 
The data and analysis show that state and local revenues generated by the mere existence of public pensions far exceed taxpayer contributions to those pensions. Taxpayers would have to pay additional taxes to receive the current level of services if public pensions did not exist. Details of these findings are discussed in the next blog.
 
* All citations are in the full report

 
 

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