When pension benefits are cut, public employees and retirees are hurt. In the past decade, every state has made changes to its public pension systems, some more significant than others. Teachers, firefighters, and other public employees have been asked to pay more (which results in a loss of take-home pay), work longer, and receive smaller benefits in retirement. Besides individual public employees,retirees, and their families, however, the economy also suffers when public pensions are cut. A new report from NCPERS explains how.
This new report builds on a previous NCPERS report on how pension cuts increase income inequality. In the previous report, researchers found that a single negative change to pension benefits causes a 15 percent increase in income inequality. The new report examines the impact this increased income inequality has on economic growth, both nationally and in each of the fifty states. It finds that if current trends of pension cuts continue, by 2025 the U.S. economy could suffer a loss of $3.3 trillion.
How exactly does this economic loss occur? Cuts to public pensions alter how money is distributed in the economy. As the National Institute of Retirement Security (NIRS) has demonstrated, defined benefit pensions promote positive economic activity through the spending of pension benefits by retirees. In their Pensionomics report released last year, NIRS found that pensions generated $1.2 trillion in economic activity in 2014. When retirees’ pension benefits are reduced, that means less money is spent in local economies.
Additionally, defined benefit pensions add value to the economy. According to the NCPERS report, 76 percent of the revenue for pension funds comes from investment earnings. This means that for every dollar contributed by taxpayers through employer contributions, that dollar is creating a significant return on investment and adding value to the economy. When less money is being contributed to the pension fund due to pension cuts, then less money is being generated through investment activity.
When money that could have been used to fully fund pensions is instead used to pass tax cuts that primarily benefit the wealthy, that further dampens economic activity. The wealthy spend a smaller percentage of their income making daily purchases. When they take home more money due to a tax cut, they are much more likely to save it and, therefore, take it out of the consumer economy. A middle-class or working-class individual, on the other hand, is much more likely to spend any additional take-home pay, thus generating economic activity.
Public pensions are an often overlooked source of strength and stability for both state and national economies. When pension benefits are cut, this hurts both individual workers and retirees as well as the economies of the states where they reside. If states continue to push forward with harmful cuts to public pensions, this could have damaging effects on the national economy.