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Unintended Consequences: Results

  • By: admin
  • On: 06/10/2020 09:11:53
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In the third part of the Unintended Consequences: How Scaling Back Public Pensions Puts Government Revenues at Risk: 2020 Update blog series, we will discuss the results of the study.  First, we describe the results of the econometric model to measure the economic impact of pension fund assets, considering other variables that also impact the economy. Second, we examine the impact of pension fund assets on the economy and the tax revenues of each state. Third, we measure the impact of spending of pension checks by retirees on state economies and tax revenues. Fourth, we evaluate the total impact of pensions (pension assets plus retiree spending) on state and local revenues. Finally, we compare state and local revenues with taxpayer contributions to examine whether or not pensions are net revenue generators, and if they are, how much more taxpayers would have to pay to receive the current level of services if there were no public pensions.
 

Unintended Consequences: Results


In the third part of the Unintended Consequences: How Scaling Back Public Pensions Puts Government Revenues at Risk: 2020 Update blog series, we will discuss the results of the study.  First, we describe the results of the econometric model to measure the economic impact of pension fund assets, considering other variables that also impact the economy. Second, we examine the impact of pension fund assets on the economy and the tax revenues of each state. Third, we measure the impact of spending of pension checks by retirees on state economies and tax revenues. Fourth, we evaluate the total impact of pensions (pension assets plus retiree spending) on state and local revenues. Finally, we compare state and local revenues with taxpayer contributions to examine whether or not pensions are net revenue generators, and if they are, how much more taxpayers would have to pay to receive the current level of services if there were no public pensions.

The US Economic Impact of Investment of Pension Assets

We have developed the NCPERS model to estimate the economic impact, as measured by personal income, of pension assets, controlling for other variables such as investment in education, infrastructure spending, multifactor productivity, and income inequality (this model combines the elements of both supply-side economics and modern Keynesian economics). All of these variables have significant impacts on the economy.



Table 1 shows that while investments in education and pension assets have a positive impact on the economy, multifactor productivity, infrastructure investment, and income inequality have a negative impact. In the past, when labor unions were strong and income inequality was low, productivity and infrastructure used to have a positive impact on the economy. With rising income inequality and declining influence of labor unions, these relationships are reversed. Most of the economic growth resulting from productivity growth and infrastructure investment now goes to the top 1 percent of income earners.

Table 1 shows that the investment of pension fund assets has a positive effect on the economy. This impact is relatively small compared with that of other variables in the model, but due to the size of the country's pension fund assets, $4.3 trillion in 2018, the magnitude of the effect on the economy and on tax revenues is significant. The results in Table 1 show that the economy grows by $1,362 for each $1,000 of pension fund assets invested.

Contribution of Investment of Pension Fund Assets to State Economies and Revenues

We have calculated the impact of pension assets on state economies and revenues. The results are shown in Table 2. Column 2 in this table shows state-by state pension assets, column 3 the contribution of these assets to the economy, and column 4 the revenues attributable to investment of pension assets. The results in Table 2 show that in 2018, overall, $4.3 trillion in pension assets contributed about $872.4 billion to state economies, which resulted in about $178.8 billion in state and local revenues.

Link to Table 2

State-by-state data in Table 2 show that the economic and revenue impacts of pension assets in the four largest states by population – California, Texas, Florida, and New York – are very significant. In California, for example, state and local pension fund assets of $911.2 billion resulted in a $437.9 billion contribution to the economy and $92.8 billion to state and local revenues. Similarly, in New York, state and local pension fund assets of $533.6 billion contributed $136.9 billion to the economy and $33.7 billion to state and local revenues. The economies and revenues of even small states, such as Vermont, South Dakota, and Wyoming, benefited significantly from investment of their pension fund assets. For example, Vermont added $30.1 million to its economy and $5.8 million to state and local tax revenues through investment of $4.6 billion in pension assets.

Contribution of Spending of Pension Checks to State Economies and Revenues

The impact of spending by retirees has a direct and significant impact on the economy and on state and local revenues because of both the dollar-for-dollar addition to personal income and the multiplier effect. Table 3 shows the state-by state impact of the spending of pension checks on the economy and revenues. Column 2 shows the dollar amount of the pension checks paid to retirees in each state. Column 3 shows the contribution of spending these checks to the economy, and column 4 shows state and local revenues attributable to pension checks.

Link to Table 3

Results in Table 3 show that in 2018, $335.2 billion was paid to retirees in pension checks. Spending of these checks contributed $836.9 billion to the economy and $162.6 billion to state and local revenues. Table 3 also shows that the economy and revenues in states such as California, New York, Ohio, and Texas benefit greatly from retirees' spending of their pension checks.

Are Public Pensions Net Revenue Positive?

Opponents of public pensions often argue that taxpayers cannot afford them. Common sense will tell us, however, that investment of pension fund assets and spending of pension checks by retirees must have a positive impact on the economy and revenues. The results shown in Tables 2 and 3 support this commonsense contention. Next, we examine whether public pensions are net revenue generators. By net revenue generators we mean that the tax revenues generated by public pensions are greater than taxpayer contributions to the pensions.

Link to Table 4

The results in Table 4 show that in 2018, pension funds generated approximately $341.4 billion in state and local revenues. Taxpayer contributions to state and local pension plans in the same year totaled $162.0 billion. In other words, pension funds generated $179.4 billion more in revenues than taxpayers contributed to them. The state-by-state results indicate that state and local pensions in 40 states were net revenue positive. In the remaining 10 states, pensions were almost revenue neutral or taxpayer contributions were significantly subsidized by state and local revenues generated by public pensions.

Overall, the data in Table 4 refute the argument that taxpayers cannot afford public pensions. The data show that if public pensions were dismantled, the burden on taxpayers would rise by about $179.4 billion to sustain the current level of services.

Obviously, if there were no defined-benefit plans, some money would move to defined-contribution plans. This is unlikely to affect the findings of our study. Even original proponents of 401(k)-type defined-contribution plans now agree that defined contribution is a failed experiment. Our own analysis shows that the shift to defined-contribution plans increases income inequality and slows the economy. Furthermore, the econometric model used in this study shows that a unit increase in income inequality will shave off $392 billion from the economy. In the end, the economic and revenue impact of the shift of money from defined-benefit to defined-contribution plans will be a wash.

Stay tuned Monday for the 2nd half of this blog: Trends in the Economic and Revenue Impacts of Public Pensions. 

 

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