With Tax Day right around the corner, we thought this would be an appropriate time to answer the question: how many tax dollars go to public pensions?
As we’ve written before, public pensions receive funds from three sources: employer contributions, employee contributions, and investment returns. Teachers, firefighters, and other public employees contribute a portion of every paycheck toward their pension during their working years. Taxpayer dollars come in as employer contributions. Since teachers, firefighters, and other public employees work for either state or local government, their salaries and benefits are paid for with the tax dollars collected by those governments.
The amount that state and local governments contribute toward public pension funds varies across the country. However, on average, state and local governments contribute 4.1 percent of direct government spending toward pensions. This is a small amount, but it has a big impact: each dollar invested in a public pension generates $8.06 in economic output. Nationwide this amounts to $943 billion a year in economic activity.
Historically, state and local government employers have contributed 19.4 percent of pension plan revenues. The overwhelming amount of pension funding- 70.4 percent- has come from investment returns. This is why pensions are pre-funded: by investing the employer and employee contributions while the employee is working, the pension fund is able to earn investment returns to pay out benefits to that employee during retirement. Pre-funding pensions is a good deal for taxpayers: it means that the majority of pension benefits are paid for with investment earnings and it generates additional economic activity as mentioned above.
Tax Day is a good time to look at how politicians spend our tax dollars and what they prioritize with that spending. Each year states give away billions of dollars in handouts to powerful interest groups through the tax code. One report from last year found that states could generate $128 billion in additional revenue each year if they taxed the wealthy and corporations at the same rate as they do working families. Meanwhile, anti-pension ideologues continue their attacks on public pensions, despite evidence that pensions are a good investment of taxpayer dollars. Politicians must be responsible stewards of taxpayer dollars and providing retirement security for public employees is a proven investment in local communities.