Since the Great Recession in 2008, warnings of an impending pension crisis have been splashed across the business pages of newspapers across the country. Despite these boisterous decrees, America’s public pension funds are stable. We explore the roots behind the false pension crisis narrative and examine the facts.
As we’ve recounted throughout this series, anti-pension ideologues like to peddle a lot of misinformation regarding public pensions and their true costs. One falsehood that gets repeated often is that paying for public pensions “crowds out” spending on other priorities for municipal and state governments. The reality is that this argument presents a false choice. Public pensions are cost-effective and represent a small portion of most governments’ budgets.
According to the National Association of State Retirement Administrators (NASRA), public pensions, on average, represent 4.5 percent of direct government spending for state and local governments. This is significantly less than their spending in other areas, such as education and health care. Also, employer contributions, which, in the case of public pensions, ultimately come from the taxpayer, make up about 20-25 percent of revenues for public pension funds. The majority of money going into public pensions comes from the employee’s own contributions and investment earnings. Since so much money in pension funds is generated through investment earnings, public pensions actually represent a huge return on investment for cities and states. The National Institute on Retirement Security (NIRS) calculates that the national average is that for every dollar invested in a pension fund, $2.21 is generated. This money goes directly into local economies through the spending of retirees. Cities and states are actually getting back more money than they spend on public pensions.
The misleading “crowding out” argument also relies on the false assumption that city and state governments have a fixed pot of money to spend. The truth is that many cities and states lose millions of dollars every year though corporate subsidies, tax loopholes, and other giveaways. Just witness the mad scramble to land Amazon’s HQ2. Hundreds of cities and states across the nation rushed to give lavish tax breaks and other incentives for Amazon to choose them as the site of their second headquarters. Even states like Illinois, New Jersey, and Pennsylvania, which are supposedly so burdened by public pensions that they can’t make their full contributions each year, offered Amazon billions of dollars in tax breaks. It seems that these states suddenly do have the money when major corporations come calling.
Sadly, Amazon’s HQ2 is not an isolated incident. As a recent series of reports from Good Jobs First revealed, many states give away more each year in corporate subsidies and tax breaks than the cost of fully funding public pensions. Take, for example, Kentucky, home to a major fight over the future of public pensions. Good Jobs First found that the annual cost of funding public pensions is only two-thirds of the cost of corporate giveaways in the state. What is even more revealing, however, is a report from the Office of the State Budget Director that found Kentucky actually gives away more in tax breaks each year than it collects in tax revenue. Let that sink in for a moment. Kentucky’s tax code is so full of loopholes that the state actually loses more money than it collects. If Kentucky needs more money to fund its public services, then fixing its porous tax code seems like a pretty obvious place to start.
Again, Kentucky is not an outlier. Kansas offers another cautionary example. Several years ago, the state began what the governor called a “live experiment” in tax policy. The experiment was a complete disaster. By embracing Gov. Brownback’s extreme right-wing tax policy, the state lost much-needed revenue and the state’s budget has been decimated as a result. Guess what got cut when the money dried up? Funding for public schools. The budget for road repairs. Funding for libraries and local health services. When those areas couldn’t be cut any more, the state skipped payments for public pensions. A similar situation is playing out south of the border in Oklahoma, another state that embraced harmful, but less extreme tax cuts and is now suffering from lost revenue and massive budget cuts. Due to the state legislature’s inability to raise revenue and pass an adequate budget, state agencies in Oklahoma will face deep across-the-board budget cuts in early December. The Department of Mental Health and Substance Abuse Services could see its entire budget eliminated after December 1st.
The reality is that funding public pensions does not “crowd out” spending in other areas. While the promoters of the pension crisis myth may be fond of this tale, it is simply not backed up by the facts. Public pensions represent a small part of overall government spending. In many states, the cost of funding pensions is dwarfed by subsidies and tax giveaways to profitable corporations. It’s important to keep in mind the full picture of government revenue and spending when discussing paying for critical public needs. The “crowding out” argument is simply another way for anti-pension ideologues to attack public pensions.