Nearly a year after the coronavirus-induced economic crisis began, the U.S. economy still has not recovered to pre-pandemic levels. While the stock market has performed better than expected during the pandemic, too many people still cannot afford their basic needs. According to the Center on Budget and Policy Priorities, more than 80 million adults reported that it was somewhat or very difficult for their household to pay for usual expenses over the past seven days, illustrating that the everyday financial impacts of the crisis are far from over for many workers.
Some have cited the ongoing recession to argue that state and local governments should stop funding public pensions. However, doing so would be a mistake since research shows pensions are well-equipped to outlast the current crisis and beyond.
Here are three reasons why public pensions are affordable and sustainable:
1. Pensions are pooled investments that have time to recover from economic downturns, unlike defined-contribution plans.
Public pensions have a few advantages over defined-contribution plans like 401(k)s. With a 401(k), for example, individuals are subject to the whims of the financial market. If a worker is nearing retirement and the market takes a hit, they risk losing a great deal of their retirement savings.
On the other hand, pensions do not encounter this problem since they collectively pool risk among members. This makes pensions well-suited to weather the ups and downs of the economy.
Global consulting and actuarial firm Milliman, Inc. released a report last Thursday that showed public pensions’ resilience. They found that the average funded ratio of the country’s 100 largest public pensions increased to 78.6% in the final quarter of 2020, despite the financial volatility triggered this spring by the coronavirus pandemic, which shows how durable they are (during good times and bad).
2. Switching from a defined-benefit plan to a defined-contribution plan can be more expensive for states.
According to the National Institute on Retirement Security (NIRS), states that have previously made the switch from defined-benefit plans to defined-contribution plans paid a sizeable financial penalty for doing so.
NIRS has previously examined the experiences of four states (Alaska, Kentucky, Michigan, and West Virginia) that closed their defined-benefit plans for new hires and found that costs increased for each state after they closed their pension plans. In West Virginia, for example, the state eventually realized that they could provide an equivalent retirement benefit with a defined-benefit plan at half the cost of a defined-contribution plan, and re-opened its defined-benefit plan for teachers in 2005.
Closing a defined-benefit pension plan is not the solution to reducing costs to shore up state budget deficits.
3. Public pensions provide an excellent return on investment for taxpayers.
Last but certainly not least, public pensions also make up a small portion of government spending and provide vast economic benefits to communities across the country.
According to the National Association of State Retirement Administrators (NASRA), public pensions are primarily funded through investment earnings, which account for 61% of their revenue. As a result, they made up just 5.2% of state and local government spending in the fiscal year 2018.
This small amount of money helps create a large multiplier effect as the spending from defined-benefit pensions has been proven to stimulate the economy. According to NIRS, in 2018, expenditures from defined-benefit pensions supported $1.3 trillion in total economic output, nearly 7 million American jobs, and $191.9 billion in federal, state, and local tax revenue.
Each taxpayer dollar also supported $8.80 in total national output because pensions are pre-funded, which, according to NIRS, means that “only a small portion of the total pension payment in any given year is funded through employer or taxpayer dollars.”
Contrary to what some may claim, reputable research shows that public pensions are an affordable and sustainable way to provide lasting retirement security for our nation’s hard-working public servants.