Weighing in on the rising trend towards doing away with defined benefit pension plans, a study by the National Conference on Public Employee Retirement Systems (NCPERS) highlights the costs to the economy that will result by 2025 from the disappearance of these plans.
According to Michael Kahn, director of research, NCPERS, “A great deal of criticism of public pensions is based on a faulty understanding of how long-term liabilities are funded. Opponents of public pensions tend to whip up fear by arguing that cities and states can’t cover their long-term pension liabilities with current revenues. That’s like saying your 30-year mortgage is in trouble if you can’t pay it off from this year’s salary.”
Pensions help stimulate the economy, considering that they are a major source of income for retirees. Pension assets also provide capital for businesses. Defined benefit plans provide a $1.2 trillion stimulus to economic output, the public pension funds’ trade association reports.
The study’s findings include:
- Total personal income in the US would drop off by about $3.3 trillion by 2025 in the absence of these plans.
- Economic growth would fall off to 3.29% by 2025, from a potential 4% growth.
- As various states minimize their defined benefit plans, they are likely to see income inequality rise by 15% over a 10-year period. In turn, that will cut into the rate of economic growth by almost 18%.
According to NCPERS, a lot of the criticism of these plans is exaggerated, and they are doing better than politically motivated commentary would indicate. There are other ways to fund public pensions without doing away with them entirely, and some states are considering such alternatives.
One such approach is asset monetization, considering that state governments have assets that can provide a steady cash flow to finance pension obligations. They could sell or lease such assets to generate the money to match their long-term pension liabilities. For instance, Allentown, Pennsylvania, generated $211.3 million by leasing its water utility for 50 years, using $160 million of this inflow to offset its pension liabilities.
“The facts clearly demonstrate that the vast majority of professionally managed defined benefit public pension systems are adequately funded, are sustainable by implementing common-sense policies, and benefit the economies of communities and states,” noted Hank H. Kim, executive director and counsel, NCPERS.
He added, “Our nation faces a growing retirement crisis that has been exacerbated by the inability of defined contribution plans such as 401(k) plans to provide a reliable income stream during retirement. Defined benefit public pensions, with their reliability and superior cost management, should be a model for the private sector.”