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”?