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State and Local Governments Have Solid Capacity to Sustain Pensions
Producing compelling and timely research that illuminates practices, trends and the outlook for public pensions has always been a cornerstone of our mission at NCPERS. And in the current environment, when the Covid-19 health crisis is stirring up concern about the fiscal health of states and municipalities, this mission is particularly urgent.
Our newest Research Series report, “In Tranquility or Turmoil, Public Pensions Keep Calm and Carry On,” adds to the growing body of knowledge about the capacity of state and local governments to handle their pension obligations.
State and Local Governments Have Solid Capacity to Sustain Pensions
Producing compelling and timely research that illuminates practices, trends and the outlook for public pensions has always been a cornerstone of our mission at NCPERS. And in the current environment, when the Covid-19 health crisis is stirring up concern about the fiscal health of states and municipalities, this mission is particularly urgent.
Our newest Research Series report, “In Tranquility or Turmoil, Public Pensions Keep Calm and Carry On,” adds to the growing body of knowledge about the capacity of state and local governments to handle their pension obligations.
The report found that even if stock market indexes declined as much as 40 percent this year, it would cost a maximum of $3.86 billion per year—only 0.02 percent sliver of annual gross domestic product—for public pensions to rebound. (In fact, markets have recovered more than two-thirds of the losses they experienced this spring in response to the Covid-19 outbreak. As of May 26, the S&P 500 index stood at 2991, down 8.2 percent from its January 2nd high of 3257.)
The underlying message is that public pensions have the economic capacity to keep paying benefits in difficult times, notwithstanding short-term setbacks.
As our research director, Michael Kahn, put in, “the debate over public pension sustainability tends to take an obstructed view of the balance sheet that focuses on pension plans' debt, but ignores their income capacity.” Critics of public pensions constantly overlook the fact that “state and local governments have ongoing sources of income that provide the economic resources to handle their pension obligations,” he said.
The NCPERS analysis shows economic growth, as measured by GDP, greatly exceeds the growth in pension liabilities when they are compared correctly, using a 30-year timeframe. Critics frequently make the mistake of comparing 30-year pension liabilities with the economic resources available in a single year, with the result that much criticism of public pensions' funding status relies on a flawed comparisons.
Bad arithmetic leads to bad policy decisions. It's as if pension critics believe pension liabilities have to be paid immediately rather than over a long period of years. Most of us would be jolted if we had to figure out how to pay off our entire mortgage balance next month rather than make the monthly principal and interest payments. But we don't have to do that, and we have monthly income to help us pay the balance over the long haul. The same is true of state and local governments.
Our research show that they have the economic capacity over the long haul to honor their pension obligations, and that is what counts.
Markets, meanwhile, will do what markets do, especially in volatile times. They'll go up and they'll go down. Sometimes the gyrations will be nerve-wracking. The stewards of public pensions will also do what they do in good times and bad. They'll diversify and rebalance their portfolios to during market swings and economic ups and downs.
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