Blog entry Jack Ehnes

Educator Pensions Aid Healthy Economies

This year’s National Institute on Retirement Security conference held in early March, “Pensionomics 2012: Measuring the Economic Impact of DB Pension Expenditures,” featured a new report that demonstrates how defined benefit pensions support economic activity and how this activity keeps California’s local economies stable. There are a couple of key points made during the conference I would like to highlight.

Briefly the study finds that pension benefit expenditures provide critical stimuli for the nation’s economy, including more than $1 trillion in total economic output in the United States. According to the NIRS report for California, state and local pension funds paid a total of $30 billion in benefits to residents in 2009. Retirees’ expenditures from these benefits supported $52.5 billion in total economic output.

In 2009-10 CalSTRS paid $9.36 billion to retired members, which is roughly one-third of the $30 billion cited in the NIRS study in pension benefits. This shines light on the economic viability that defined benefit pensions, specifically those of educators, add to California’s economy. As the study emphasizes, pension benefits received by retirees are then spent in local communities. This spending ripples through the local and state economy, as one person’s spending becomes another person’s income.

Another important aspect in this equation is investment earnings. The report states between 1993 and 2009, about 26 percent of California’s pension funding came from employer contributions, 16 percent from employee contributions and roughly 58 percent from investment earnings. Earnings on investments and employee contributions—not taxpayer contributions—have historically made up the bulk of the pension fund.

Specifically for CalSTRS, investment returns account for 59 percent of the pension’s funding, 16 percent from employer contributions, 17 percent from employee contributions and another 8 percent in state contributions. This is consistent with the NIRS report in that investment earnings, not taxpayer contributions, are the largest funding source.

Clearly investment returns play a critical role in the long-term health of the system. However, while investment returns will provide the majority of funding to the system, it is unrealistic to count on those returns alone to restore CalSTRS to healthy, long-term funding. What is needed to address CalSTRS unfunded liability is an increase in contribution rates, which can be gradual and predictable. The earlier contribution increases can generate investment earnings, the lower the ultimate cost to members and taxpayers.

The NIRS report perfectly illustrates the value of a defined benefit pension and what it contributes to local economies. With this information in mind, and given the current pension reform issues being discussed, it’s important to understand that CalSTRS already has a responsible plan design in place. The reform CalSTRS needs is a long-term funding strategy.

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