An economic boost from public pensions

This from the Orange County Register on Saturday.

An economic boost from public pensions
Investment earnings – so far – have eased the cost to taxpayers.

Saturday, May 5, 2007

From Detroit Free PressEven though government workers cost the state money when they retire, the money they spend from their pensions can help pump up their local economies, according to a new study by California’s two state public pension funds.

The study, by professors at Cal State Sacramento, concludes that in 2006, payments to state and local government retirees added about $10.3 billion to the gross state product, equivalent to nearly 139,000 jobs.

In Orange County alone, California Public Employees’ Retirement System and California State Teachers’ Retirement System pensions boosted the local economy by an estimated $750 million – nearly 9,990 jobs. The average retiree here got $2,011 a month.

The pension funds commissioned the first-of-its kind economic impact study to offset criticism that their retiree benefits are a drain to taxpayer coffers with little public benefit.

“We have for many years gotten calls from retirees asking what the economic impact is of retiree benefits on the community,” says Patricia Macht, a CalPERS spokeswoman. “This study shows that payments add to the strength of the economy.”

The study also calculated the breakdown in annual pension contributions by source – investment earnings, employee contributions and employer contributions.

For CalPERS, the largest U.S. public pension fund with assets of $241.7 billion, earnings on investments made up more than three-quarters of retiree benefits paid. Employee and employer contributions were about 12 percent each.

CalSTRS, which has $162.2 billion in assets, also gets about three-quarters of its contributions from investment earnings. Employees and employers pay about 10 percent each, and the state makes a 5 percent contribution.

Economist Esmael Adibi at Chapman University in Orange doesn’t quarrel with the numbers in the study, which used standard methodology for estimating economic impact.

He says the study, however, has several flaws, including the assumption that public pensions have more of an effect than if the retirees had to rely on other resources like private sector employees must do.

“It’s just like what would be the economic impact if we didn’t have the Angels. Does that mean people would not spend money on sports?” he asks. “(Public employees) would still retire.”

And, while investment earnings may cover a major portion of public pensions today, the study doesn’t address what happens as the bulk of the baby boomers retire.

Over the past 20 years, CalPERS’ investment earnings have averaged 10.6 percent, just above the S&P 500, which averaged 10.5 percent. There were four years, however, that CalPERS’ earnings were down, including a three-year run starting in 2000 that culminated with a 9.5 percent loss in 2002. 

“Either the investments are going to have to get higher returns, the employees will have to contribute more or the taxpayers will have to come up with more money,” Adibi says.

He says the study also does not address the whole idea of defined benefit plans, in which the employees are guaranteed pension benefits that are paid for by future workers.

In recent years, many private employers have dumped defined benefit plans because they are uncertain they will be able to support future costs. Private defined benefit plans in the United States dropped from 112,208 in 1985 to 28,769 in 2005, according to the nonprofit Employee Benefit Research Institute.

“With the existence of a defined benefit program by itself, at some point you are going to get into (financial) trouble,” Adibi says.

Nonetheless, CalPERS Macht believes the pension study provides some valuable information to the public.

“What the study shows is (the pensions) are not a burden, but an asset,” Macht says. “And most of the pensions are paid for through smart investing.”