Hidden Cost of Taking NCPERS Study Seriously

A study by the National Conference on Public Employee Retirement Systems (NCPERS) projects that the nation’s economy will suffer severe setbacks by the year 2025 if the dismantling of Defined Benefit (DB) public sector pensions continues at its current pace.

The study incorporates most of the dangerous bromides that have brainwashed unions and public employees into believing that an unregulated DB system is to the advantage of most of them.  It’s not and here’s why:

As Tom Sgouros noted in his recent study, full funding of pensions might be a meaningless goal in the public-sector context. Accounting principles designed for private-sector pensions, such as rate-of-return assumptions, should not be applied to the public sector. Whereas private companies could and do go out of business, state governments are here to stay. Does anyone really believe the Commonwealth of Kentucky – or any other state, for that matter – will go out of business and see its assets sold to a foreign nation? (page 5)

Kentucky may still be with us in five years but that does not mean they will be making full pension payments to their retirees.  After all, Prichard, AL, Central Falls, RI, and Detroit, MI are still with us as is Puerto Rico. While on the state level we still have New Jersey but New Jersey retirees no longer have COLAs.

Spending by retirees stimulates local economies, and pension assets are an important source of capital for businesses. (page 5)

Spending by taxpayers also stimulates local economies with that spending more likely not to be on hedge funds or in out-of-state retirement communities.

When bubbles pop, they create economic volatility, and in the end, everyone suffers. Robert Shiller, Nobel Laureate in economics, notes in Irrational Exuberance that one of the causes of asset price bubbles is conversion of DB plans into DC plans. Such conversion has forced millions of Americans, who had little or no investment experience or knowledge of the stock market or electronically traded funds, to make investment decisions that led to irrational and unsustainable asset prices, or a bubble. (page 7)

What about investment decisions being made by politicians desperate enough to keep contributions down that they load these plan with alternative investments whose values can be easily inflated? No bubble worries?

Policymakers who intentionally or unintentionally buy into misleading information about unfunded pension liabilities, computed using rate-of-return assumptions designed for private-sector companies, overlook the economic damage that dismantling of public pensions inflicts on the economy. It seems that opponents of public pensions have little or no understanding of how pensions are funded. We rarely hear about the fact that an increasing proportion of pension fund money comes from investment earnings. For example, in 1940, 43% of pension fund money came from employee contributions, 35% from employer contributions, and 22% from investment earnings. In 2014, the same figures were about 7%, 17%, and 76%, respectively. Also, we rarely hear that funding status of pensions is steadily improving, approaching 76%.

Is it that public pensions invest in completely different asset classes or that those overseeing public plans invest with only the thought of what the current contribution would be since there is no need to think long-term when the plan sponsor is “here to stay”?

18 responses to this post.

  1. Posted by Anonymous on May 25, 2017 at 3:09 pm

    (1) The idea that ………. “economic damage that dismantling of public pensions inflicts on the economy” ………… is Union-mouthpiece hogwash.

    Think about it. For every LESS $1 less in pensions (and hence $1 less spent by NJ’s Public Sector retirees) that would result from lowering the excessive pensions in place today, the Taxpayers (via the payment of less in taxes) would have $1 MORE to spend ….. thereby OFFSETTING $ for $ the any impact of lowering Public Sector DB pensions.

    (2) The concept that “interest” (or investment earnings) is an independent source of payment of the costs of Public Sector pensions is ridiculous.

    Interest FOLLOWS principle, and does not exist w/o the original contributions for ONLY 2 sources ….. the workers and the Taxpayers.

    And, any interest earned on Plan assets represents an equal amount of interest that the contributor (be it the worker or the taxpayers) has forgone …….. i.e., would have earned in the absence of the need to fund these ludicrously generous pensions.


    • Posted by Anonymous on May 25, 2017 at 3:31 pm

      I should have added to the end of my last paragraph above….. with the following:

      That “foregone” interest (that WOULD HAVE been earned by the worker and the Taxpayers from their contributions) represents additional contributions FROM THEM.

      The is no 3-rd element or source (called interest or investment income) contributing towards the cost of these ludicrously excessive pensions promises.

      The ENTIRE cost of NJ’s Public Sector pensions is borne by the workers and NJ’s taxpayers, and right now it’s structured such that the Taxpayers are responsible for all but the 10% to 20% (INCLUDING all the interest earned on their contributions) of the total expected cost of promised pensions.

      The Taxpayers are stuck with the responsibility for the 80% to 90% balance ……….. at least until we tell them NO, go suck wind !


  2. Posted by Anonymous on May 25, 2017 at 3:56 pm

    It’s personal self interest, if elected, triple dipping Kim (&hubby) against the so-called Union guy Phil – choice what a beautiful thing!



  3. Posted by MJ on May 25, 2017 at 3:59 pm

    Aw shucks what do those noble laureates in economics know anyway>>>>>>>


    • Posted by S Moderation Douglas on May 27, 2017 at 3:20 pm

      President Harry Truman hated what he termed two-armed economists, those who would advise him first “on the one hand” and then “on the other hand.” Give me a one-armed economist, he demanded, an adviser who wouldn’t waffle.

      Or, as my Daddy said; Economists are like weathermen. They are fifty percent right half the time.


  4. Posted by Anonymous on May 25, 2017 at 6:27 pm

    “Spending by retirees stimulates local economies, and pension assets are an important source of capital for businesses.” …unfortunately over 30% of state retirees leave the state with taxpayers dollars sent to them elsewhere .dollar wise it looks like 3 billion every year out the window into other states economy
    ….from 2014 .http://www.pressofatlanticcity.com/business/new-jersey-pension-dollars-going-out-of-state/article_9acbbc90-c68c-11e3-86c9-001a4bcf887a.html


  5. Posted by Anonymous on May 26, 2017 at 12:00 pm

    Not to worry NJ taxpayers more fake news…..
    what we need is a private sector outsider to come in and shake things up. Like the Prez in “drain the swamp”, Unions to the back of the line b/c who’s kidding who it’s “big” private sector corporate America in the politician pockets.



  6. Posted by Anonymous on May 26, 2017 at 6:45 pm

    & zerohedge for. a lot of private sector workers IF ALL governmental subsidies, grants, and tax breaks are eliminated!


  7. Posted by Anonymous on May 26, 2017 at 8:22 pm

    I think a 2% increase in the sales tax dedicated to the state pension fund would solve the problem and not hurt anyone very much!


    • Posted by Anonymous on May 26, 2017 at 11:12 pm

      And I think a 50% DECREASE in the “value upon retirement” of currently promised pensions (via reductions in the formula-factors, increases in the age at which one can retire w/o an actuarial reductions, and full/unsubsidized actuarial reductions for early retirement), which would even AFTER such reductions, STILL leave all Public Sector pensions MUCH richer than those typically granted Private Sector workers (who now pay for 80% to 90% of the total cost of current Public Sector pensions), is a FAR FAR FAR better idea and would also “not harm anyone” ….. only put in place reductions that are eminently just, reasonable, and appropriate, and necessary !


  8. Posted by S Moderation Douglas on May 27, 2017 at 3:35 pm

    “Spending by retirees stimulates local economies, and pension assets are an important source of capital for businesses. (page 5)”

    I think they may have a better argument on page 6:

    ” Pension funds are also great stabilizers
    of local economies. Pensioners keep receiving
    their pension checks in good as well as bad
    economic times. While incomes from jobs and
    investments decline during bad economic times,
    pension checks provide an economic cushion and
    keep local businesses afloat.”

    Same thing goes for Social Security (and welfare). As much as many ( even/especially businesses) complain about welfare spending, what would recessionary cycles look like if retirees, SS recipients, and welfare did not continue to receive …and spend… their monthly checks? There is a reason the Food Stamp/SNAP program is under the Department of Agriculture.


    • Posted by Anonymous on May 27, 2017 at 5:21 pm

      As usual SMD, you are wrong ………

      CURRENT taxes are used to pay for the materially unfunded pensions of those already retired. Every $1 of lower pensions (not available to spend by Public Sector retirees if their pensions were smaller). would be OFFSET by an additional $1 left in the Taxpayers’ pocket (via the need to fund SMALLER pensions) for THEM to spend.

      The net impact to the economy would be near zero.


  9. Posted by Anonymous on May 27, 2017 at 5:15 pm

  10. […] faulty research commissioned by misguided public unions the National Conference of Public Employee Retirement […]


  11. […] – pensions are widely considered healthy if they are 80 percent funded. According to a recent study by the National Conference of Public Employee Retirement Systems, pensions nationwide have hit a 76 percent funding level, up from 74 percent post-financial crisis. […]


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