The Truth About Pensions and Education Funding
2023 NCPERS Research Update: Do Pension Expenditures Impact Education Spending?
Critics claim that public pension costs are squeezing out funding for schools and classrooms. But what does the data actually show? This comprehensive 2023 NCPERS research report tackles one of the most persistent—and misleading—narratives in public finance: that pension expenditures crowd out education spending.
Following the Money Through 26 Years of Data
Using rigorous analysis of state and local government finances from 1993 to 2019, this study examines the crowding-out claim from four different angles. The findings are striking: when adjusted for volatility in pension funding patterns, education spending grew at three times the annual rate of pension contributions nationwide—2.48% versus 0.82%.
In 48 out of 50 states, education funding outpaced pension growth. Even in California, the epicenter of crowding-out rhetoric, education funding grew three times faster than pension expenditures. The analysis employs statistical trend line analysis and risk-adjusted growth rates to cut through the noise and reveal what's really happening with public budgets.
Where the Real Budget Squeeze Comes From
So if pensions aren't the problem, what is? The research identifies a fundamental misalignment between state and local revenue systems and economic growth. As states have shifted away from progressive, stable tax sources toward regressive schemes like lotteries and user fees, their revenue systems have become increasingly unable to keep pace with economic expansion.
The data shows that pension contributions consume just 3.6% of state and local revenues on average, while education takes 33.8%—making the crowding-out argument a mathematical impossibility. Moreover, most pension funding comes directly from state appropriations outside education budgets, meaning these funds were never in competition for the same dollars.
The Bigger Picture: Revenue Systems Out of Sync
The study goes beyond debunking the crowding-out myth to diagnose the real challenge facing public finance. Through scatter plot analysis comparing economic growth to revenue growth across 40 years, the research demonstrates that state and local tax systems consistently fail to capture their fair share of economic expansion. This structural mismatch—not pension costs—explains why states struggle to adequately fund both education and retirement security for public workers. The implications are clear: fixing broken revenue systems, not dismantling pensions, is the path to sustainable public services.
Key Takeaways:
- When viewing a 26-year period from 1993 to 2019, education funding grew at three times the annual rate of pension spending. During this period, whereas growth in education funding has been stable, pension spending has been volatile.
- Pension funding is unlikely to displace education funding because pension contributions are such a small part of state and local revenues. During the past quarter century, the average pension expenditures were 3.6% of state and local own-source revenues (taxes and fees collected by municipalities). The same figure for education expenditures was 33.8%. As a result, even if pension expenditures rise faster than education expenditures, pension funding is unlikely to crowd out education funding because the ratio of the two is likely to stay about the same.
- State and local governments face many competing priorities. The governments can afford both pensions and education, but to do so, they must take determined steps to bring their revenue systems into harmony with the economy.
Download the full report to see the state-by-state data, understand why pension reforms won't solve education funding challenges, and discover what policymakers should focus on instead to ensure adequate resources for schools, pensions, and all vital public services.