On June 2, the National Conference on Public Employee Retirement Systems (NCPERS) released a new report that shows how durable public pensions are during economic downturns.
The report states that “the debate over public pension sustainability consistently focuses on one element alone – debt – without regard to what is on the other side of the ledger,” such as economic growth measured by GDP. This is important to recognize because, “even as pension debt is rising, so is the economic capacity of employers – state and local governments – to handle it.”
NCPERS found that “economic growth, as measured by GDP, greatly exceeds the growth in pension liabilities when they are compared correctly,” meaning that pension plans are in an excellent position to recoup current market losses and weather the coronavirus-driven recession if states maintain funding discipline.
Pension opponents often mislead taxpayers and lawmakers by reducing a 30-year pension liability in the course of a single year. This makes for flawed analysis that greatly exaggerates the liabilities of pension plans, as pension plans are designed to be invested for the long-term.
Take a 30-year mortgage, for example. Credit rating agencies and banks understand that the mortgage will be paid over a determined period of time. With that in mind, those with mortgages are still able to access credit and build equity in their homes.
To get a more accurate picture of pension liabilities compared with GDP, NCPERS examined both pension liabilities and GDP over a longer period of time (from 2002 to 2017) and discovered that “the ratio between liability and GDP has been fairly stable during the study period,” and that “GDP growth far exceeds growth in pension liabilities.”
Therefore, it’s misleading for pension opponents to use the current economic downturn as an excuse to criticize public pensions, as pension liabilities did not grow faster than GDP during multiple market downturns in the time period analyzed (the after-effects of the dot com crash and the Great Recession).
The report cautioned policymakers, however, to not “overlook the well-accepted principles and discipline of pension funding and risk management policies and practices.” It’s critical for states to maintain funding discipline with their pension plans, especially during the current economic crisis.