The Positive Impact of US Public Pensions?

Debra Cope of Business Wire reports on the positive impact that public pensions have on the US economy grew 30%, to $179B, from 2016 to 2018:
Public pension funds helped power the U.S. economy during 2018, generating $179.4 billion more in state and local government revenues than taxpayers put in, according to a biennial study by the National Conference on Public Employee Retirement Systems.

Public pensions’ positive financial impact rose 30.6 percent from the $137.3 billion level notched in 2016, according to the study, “Unintended Consequences: How Scaling Back Public Pensions Puts Government Revenues at Risk.” The 2020 edition of the study builds on NCPERS’ 2018 landmark analysis of how investment and spending connected to pension funds impact state and local economies and revenues.

The analysis of how investment and spending connected to pension funds impact state and local economies and revenues draws on historical data from public sources including the U.S. Census Bureau, Bureau of Economic Analysis, and Bureau of Labor Statistics. While pension fund assets are invested globally, the economic impact of these investments can be traced down to individual states based on the NCPERS study methodology.

“The positive economic effects of public pensions increased significantly over the course of two years,” said Michael Kahn, NCPERS’s research director and the study’s architect. “This means that if public pensions didn’t exist, policy makers would need to increase taxes on their constituents to sustain the current level of public services.” Kahn noted that the study also found that in 40 states, pensions were net contributors to revenue in 2018, an increase from 38 states in 2016.

The original Unintended Consequences study in 2018 broke ground by examining how state economies and tax revenues are affected when pension funds invest their assets and retirees spend their pension checks, and how taxpayer contributions compare to revenues, said Hank H. Kim, executive director and counsel of NCPERS.

“Decade after decade, public pension funds have worked by accumulating assets over a worker’s lifetime,” Kim said. “Steady contributions by employers and employees plus investment returns over the long haul have consistently produced results that provide career public servants with a modest but reliable income stream in retirement.”

“Pensions are the quintessential long-term investment, yet they are often cast as a pawn in political dramas over short-term spending,” Kim added. “This study underscores that breaking faith with public pensions is actually a costly strategy for state and local government. In the long-term, diminishing public pensions will backfire.”

NCPERS’s analysis of the data also showed:
  • The economy grows by $1,372 for each $1,000 of pension fund assets. While the figure sounds small on the surface, the size of pension fund assets—$4.3 trillion in 2018—means that the impact of this growth is greatly magnified, the study found.
  • Investment of public pension fund assets and spending of pension checks by retirees in their local communities contributed $1.7 trillion to the U.S. economy.
  • Economic growth attributable to public pensions in turn generated approximately $341.4 billion in state and local revenues. Adjusting this figure for taxpayer contribution $162 billion yields pensions’ net positive impact of $179.4 billion.

The National Conference on Public Employee Retirement Systems (NCPERS) is the largest trade association for public sector pension funds, representing more than 500 funds throughout the United States and Canada. It is a unique non-profit network of public trustees, administrators, public officials and investment professionals who collectively manage more than $4 trillion in pension assets. Founded in 1941, NCPERS is the principal trade association working to promote and protect pensions by focusing on advocacy, research and education including e-learning for the benefit of public sector pension stakeholders.
You can read the updated 'Unintended Consequences' study here.

The findings don't surprise me. Too many people don't appreciate just how important public pensions are to the overall economy.

In 2013, I wrote about the benefits of Canadian defined-benefit plans and cited a study which found these key findings at the time:
  • In 2011, these pension plans collected more than $70 billion in contributions and in that same year, paid out $74 billion in retirement benefits to Canadians, or 49% of all non-OAS retirement benefits, and invested approximately 35 per cent - or $714 billion - of Canada's total retirement assets
  • The Top Ten pension funds have invested roughly $400 billion in Canada, including $100 billion in real estate, infrastructure and private equity;
  • They comprise four of the top 20 global commercial real estate investors and four of the top 20 global investors in infrastructure assets;
  • They directly employ 5,000 professionals in the Canadian financial sector and an additional 5,000 employees in their real estate subsidiaries.
Since then, their influence on the overall Canadian economy has only grown.

But while US and Canadian pensions both have a positive impact on their respective economy, there are crucial differences.

Importantly, US public pensions don't have the same arm's length governance model which has led to the success of Canadian plans and this has impacted their long-term performance and funded status.

I recently wrote a comment warning my readers that US pension bailouts are coming. There are many chronically underfunded US public pensions which will not come out of this crisis unscathed.

Somewhat controversially, I stated the following:
And remember what I keep telling you, pension bailouts are all about bailing out Wall Street which includes big banks and their big private equity and hedge fund clients that need perpetual funding.

It has nothing to do with bailing out pensioners but politicians will make it look that way.

Again, it may not be right away, but mark my words, Congress will eventually bail out many chronically underfunded pensions and the Fed and Treasury will just monetize this debt.

The problem? Just like keeping zombie companies alive, they will keep zombie pensions alive to make sure the elite on Wall Street are able to keep tapping them in perpetuity for their next fund.

And then we wonder why after every major crisis, inequality keeps soaring to unprecedented levels.

George Carlin was right: "It's a big club, and you ain't in it. You and I are not part of the big club."
I stand by those comments and you only have to look at what is going on now  as the Fed bails out Wall Street with more liquidity and the US government is issuing new 20-year government bonds to pay for all these bailouts:

So, never mind what Mitch McConnell said about states dropping dead, if for any reason US public pensions need a federal government bailout, the private equity and hedge fund masters will make sure they get it (to ensure they keep getting funded in perpetuity).

This is what irks me about the bailout mentality which rewards corporate and financial elites and does nothing to address serious structural issues plaguing the US economy and public pensions.

US public pensions will never be structurally sound until they do four important things:
  1. States need to make contribution holidays constitutionally illegal and always top out their public pensions no matter what.
  2. Get the governance right to get governments out of the decision-making and increase compensation to attract and retain talent which can manage more money across public and private assets internally (do a lot more co-investments with their private equity partners).
  3. Lower their discount rate to 6% or lower to reflect the reality of what they can expect in terms of assumed returns on their assets over the long run. If this means hiking the contribution rate, so be it. 
  4. Adopt some form of risk sharing like conditional inflation protection so when plans are underfunded retired and active members share the burden of making the plan fully funded again (this ensure intergenerational equity).
These are four critical elements to success but I'm not sure the wolves on Wall Street want to see happen in the United States because they want to hold sway over these public pensions.

Having said all this, I am a huge proponent of public pensions, especially well governed ones, and believe they are critical to bolstering retirement for millions and they positively impact the overall economy.

When people retire with a safe, secure defined-benefit pension, even if it's a modest one, they can count on that income to live throughout their golden years, and spend more in retirement. This translates into more economic activity and more sales and income taxes for governments.

Below, Chris Ailman, CIO of CalSTRS, joins "Squawk Alley" to discuss the state of the market amid the coronavirus pandemic.

Ailman thinks the market is 'far from out of the woods' and I agree, the great market disconnect is coming to an end and this is just the last dance driven by central banks' liquidity, quant funds and CTAs before reality sinks in.

Also, Yahoo Finance Presents editor-in-chief Andy Serwer spoke with North Island Chairman Glenn Hutchins about the impact coronavirus is having on the US economy and ways to invest during the uncertainty. Take the time to watch this interview here, Hutchins is excellent.