Chris Christie Pension Cuts Could Damage Economy: Report

When it comes to the politics of public employee pensions, New Jersey is a political microcosm. Republican Gov. Chris Christie has portrayed pension benefits as devastating burdens that must be addressed through big cuts to benefits. At the same time, he has depicted a record $4 billion of new tax breaks and subsidies to corporations as a positive investment in economic development.

In many states and cities across the country, it is much the same story. Pensions for government employees are depicted as liabilities requiring some mix of painful choices -- either tax increases to finance higher contributions, or cuts to retiree benefits. Unlike taxpayer-financed corporate subsidies, those pensions are rarely depicted as a form of economic stimulus. Yet a new study released today argues that they should be. In New Jersey, the study says for example, pension money helps support 96,763 jobs.

In the analysis of about what it calls “Pensionomics,” the National Institute on Retirement Security (NIRS) documents how the $3 trillion state and local public pension system supports more than 28 million Americans and paid out $228 billion in benefits in 2012 (the most recent year for which the data is available). According to the report, that works out to an average annual benefit of $25,354 -- or a little more than 150 percent of the federal poverty line for a retired couple.

NIRS, whose website describes it as a coalition of employee benefit plans, trade associations and financial services firms, said that amount of money supports roughly 3 million jobs and that when combined with private pension benefits, the spending generated by the national retirement system supports more than 6 million jobs: 4.4 percent of the total national workforce. The report also says that the economic multiplier effect from retirees spending their pension benefits generates $135 billion a year in federal, state and local tax revenues.

After the financial crisis of 2008 damaged pension fund returns and increased projected unfunded liabilities, budget-strapped states such as Illinois have passed legislation reducing pension benefits, while New Jersey lawmakers now consider the same path. Other states such as Oklahoma, Rhode Island and Kentucky have shifted more public employees into 401(k) plans or hybrids mixing traditional defined benefit plans with 401(k) systems. Pennsylvania lawmakers are now considering such a move, and Ventura County, California, voters are expected to face a 401(k) ballot measure in the fall.

Those latter changes often result in lower benefits for retirees and higher contributions from employees. Critics charge that the changes will actually end up costing taxpayers more than existing pension plans. In addtion, 401(k) plans often involve nest egg-eroding fees from the financial firms that manage them. The Associated Press recently reported on data from the liberal Center for American Progress that showed “the typical 401(k) fees — adding up to a modest-sounding 1 percent a year — would erase $70,000 from an average worker's account over a four-decade career compared with lower-cost options.”

The NIRS study essentially argues that cutting guaranteed benefits or converting traditional public pension plans into 401(k) systems would harm economies by reducing the amount of pension benefits that will be spent by retirees.

“Reliable pension income can be especially important not only in providing retirees with peace of mind, but in stabilizing local economies during economic downturns,” wrote the report’s author, Nari Rhee. “Retirees with [traditional] pensions know they are receiving a steady check despite economic conditions. In contrast, retirees may be reluctant to spend out of their 401(k)-type accounts if their savings are negatively impacted by market downturns.”

In recent months, the tide of pension cuts appears to have ebbed. Reuters reports that according to the National Conference of State Legislatures, state legislators “had filed 1,234 pension bills in the first four months of 2014...but few bills passed into law have made big changes.” In late 2013, Cincinnati voters resoundingly rejected a proposal to convert the city's traditional pension system into a 401(k)-style plan.

In response to earlier NIRS studies, the conservative American Enterprise Institute has disputed the entire idea of pension benefits as an economic booster.

“This reasoning is wrong because it ignores the cost to the economy of providing public pension benefits,” the conservative think tank’s scholar, Andrew Biggs, has written. “Each taxpayer dollar flowing into public pensions is a dollar that cannot be spent or saved on something else. To the degree it is not spent, today's economy is smaller as a result. To the degree it is not saved, tomorrow's economy is smaller, since saving helps boost productivity...Public-sector pensions are not economic stimulus. They are simply a transfer of money from taxpayers to public employees.”

Diane Oakley, the executive director of NIRS, took issue with that characterization.

“Their argument is we are not showing what the other opportunities would be,” she told IBTimes. “But what’s the alternative -- do you turn around and spend that money on tax credits to corporations in hopes that they will create jobs? Our analysis is based on real facts and real data and what people have actually been paid, and what that means for local economies.”