STUMP » Articles » Calpers and the Benefits of Public Pensions: Things Seen and Unseen » 6 October 2015, 17:54

From Andrew Biggs, a calling out of perennial bullshit:

The California Public Employee Retirement System (CalPERS) issued a report in July claiming that its benefit payments to retired government employees in 2013-2014 “supported 104,974 jobs throughout California and generated more than $15.6 billion in additional economic output.”

Through an economic “multiplier effect,” in which pension benefit checks are spent and re-spent throughout the economy, CalPERS claims to have generated over $387 billion in sales tax revenues and $328 billion in property tax receipts.
To reduce pension benefits for public employees, the study implies, would harm the overall California economy.

One would expect a study like this to gild the lily a bit. But the CalPERS economic stimulus study goes far beyond that: It is a cost-benefit analysis that doesn’t include any costs. This study is nothing short of propaganda that wouldn’t get a passing grade in a freshman economics course.

…..
The logic of these studies is simple: Retirees spend their CalPERS benefits on, say, food, housing and medicine. The grocers, homebuilders or health care providers who receive retirees’ money re-spend it, and so on down the line.

I assume you know the kicker here.

The taxpayers of California also spend money on food, housing, and medicine.

Back to Biggs:

Tradeoffs between costs and benefits are central to policymaking, but CalPERS acts as if those trade-offs don’t exist. It pays generous benefits to employees, averaging $59,700 for a full-career employee retiring in 2013-2014, with most employees also receiving Social Security.

The trade-off for generous benefits is high costs. The average government contribution to CalPERS in 2013-2014 from the state, public school or local public agency was nearly 19% of employee payroll.

That’s about six times more than the typical private employer contributes to employees’ 401(k) plans, according to data from the Bureau of Labor Statistics.

But a reader of CalPERS’ study would come away with the conclusion that Californians can spend their way into prosperity, that using Californians’ money to pay generous retirement benefits for public employees stimulates the economy more than other uses of the money.

Now, yes, some of the money for the pensions will come from the investment returns. The cost of the pensions should not necessarily be the benefits paid, but the contributions made to pay for those pensions.

If they were 100% funded.

A tangent — I like this bit of Biggs’s author blurb:

Biggs, a resident scholar at the American Enterprise Institute, was deputy commissioner for policy at the Social Security Administration and co-vice chair of the Society of Actuaries Blue Ribbon Panel on Public Pension Funding.

The Blue Ribbon Panel material is here.

LET’S GO TO THE GRAPHS

By the way, what’s Calpers’ funded ratio?

The most recent ratio on the public plans database is 75%.

Here’s the graph:

And this is the percent of payroll they’ve been paying for these results:

Hmmm, doesn’t look like that funding ratio has changed. Even though we’ve had a 5+ year bull market.

LET’S GO TO THE STUDY

Because Biggs was writing for syndication, he couldn’t put in any links, but I can. I think it fair to show what they actually said.

CalPERS Economic Impacts in California

Introduction

The California Public Employees’ Retirement System (CalPERS) plays a vital role in California’s economy by providing CalPERS benefits to more than 500,000 retirees and investing $25.7 billion throughout the state (as of June 30, 2014). This money provides several ancillary benefits as it ripples through the state’s economy. In addition, for each taxpayer dollar CalPERS invests, CalPERS benefit payments deliver a return of $9.64 in economic activity to California.

CalPERS recently conducted analyses using the IMPLAN economic model to estimate the statewide economic impacts of its benefits and investments. This document summarizes findings from the analyses.

Now, obviously, they have to use a model to estimate economic impact.

They would also need a model to think through what the taxpayers would have used if they had the money to do as they pleased. After all, taxpayers could have spent more locally, rather than shoveling it into the pension plan (Biggs’s point).

For what it’s worth, they did restrict the analysis to Calpers retirees who actually live in California.

Let’s see what percentage that is. In the study, they say there are 502,772 Calpers retirees in California. According to the Pension Plans Database, there were 566,975 beneficiaries of the plan. This does look a bit high to me for numbers, but then, I’m used to New York experience.

Retiring in California is probably a lot more pleasant, climate wise, than in New York, even forgetting the tax regime.

By the way, they do have some reckoning of costs in the study.

Here it is:

[page 6]
CalPERS return on taxpayer contributions

The economic impacts of CalPERS benefits far exceed initial taxpayer contributions. Investment income and contributions from public employers and employees fund CalPERS benefit payments. The proportion of funds that come from each source changes over time. As of June 30, 2014, for every dollar in benefits, 67 cents came from investment earnings, 21 cents from employer contributions and 12 cents from employee contributions.9

By applying the 21 cents per employer contribution dollar to total benefits paid in California in FY 2013-14, staff estimate that approximately $3.2 billion came from employer contributions. CalPERS benefits, therefore, returned $9.64 in economic activity for each taxpayer dollar contributed toward
the system.10

FWIW, “employee contributions” are taxpayer contributions, too. Where does the money to pay these people come from? It’s all taxpayer money.

That said, the proper comparison is not the taxpayers’ original contributions, but what they could have contributed elsewhere. California taxpayers are guaranteed to have a California presence, by definition.

There’s no reason to believe that the Calpers pensioner has a higher economic multiplier than the California taxpayer. There is some reason to believe the multiplier is less, because a non-zero percentage of those retirees don’t live in California.

THINGS SEEN AND UNSEEN

Here’s the problem.

Until you get to crisis, the effect on the taxpayer is diffuse. Their taxes go to a whole variety of things, and it’s not like they have a reckoning of the bit for pensions versus everything else they pay for. They don’t really see the pensions cost, especially if there are some pleasant assumptions that make the pensions look cheaper.

On the other hand, the Calpers retirees know exactly how much is coming in from their pension checks, and can see if anything there gets whacked, such as a less-than-expected COLA. They’ve got a really direct interest.

Until crisis comes.

When the costs of the pensions eat up so much of taxpayer funds that services have to get cut — the taxpayers notice. And they will not give a damn about your “multiplier effect”, because they thought they were paying for government services now (which includes pension benefits accrued by people working now)…not paying for someone who stopped providing services years ago.

They are not particularly fooled by these charts. “Look at all the restaurants the retirees support!” proclaims the study.

“I could’ve dined at those full-service restaurants,” thinks the taxpayer. “I like Burger King, but….”

And here’s an interesting map — it plots the modeled economic impact of Calpers payments.

Should be interesting to compare that against where services are being cut in order to make Calpers payments.

WHAT HAS BEEN SEEN AND WILL BE SEEN

The public service cuts are already being seen, in some places. This piece is from 2010 on the Vallejo bankruptcy, by Steven Malanga:

Blame Vallejo’s politics, dominated by public-sector unions, for the city’s sorry fiscal situation. “Police and firefighter salaries, pensions and overtime accounted for 74 percent of Vallejo’s $80 million general budget, significantly higher than the state average of 60 percent,” reported a 2009 Cato Institute study. The study highlighted a shocking level of enrichment: pay and benefit packages of more than $300,000 a year for police captains and average firefighter compensation packages of $171,000 a year. Pensions are luxurious: regular public employees can retire at age 55 with 81 percent of their final year’s pay guaranteed, come hell or a stock-market crash. Police and fire officials in Vallejo, as in much of California, can retire at age 50 with 90 percent of their final year’s pay guaranteed, including cost-of-living adjustments for the rest of their lives and the lives of their spouses. And that’s before taking advantage of the common pension-spiking schemes that propel payouts even higher.

When a city spends so much taxpayer money on retirees, it doesn’t have much left over for services that might actually benefit the public. That’s why Vallejo has been slashing police services and has even warned residents to use the 911 system judiciously. “Since 2005, the number of police officers has dropped from 158 to 104,” a San Francisco Chronicle editorial about Vallejo pointed out recently. “In 2008, Vallejo had a higher violent crime rate than any other comparable city in California.” And it isn’t just public safety that has suffered. A 2008 Chronicle article reported on a budget plan that “cuts funding for the senior center, youth groups and arts organizations, to the dismay of residents.” Citizens complain about an increasingly decrepit downtown.

Vallejo has been followed by Stockton and San Bernardino. All of these bankruptcies have been paired with service cuts, much of which would be considered essential services being cut.

This is not unique to California, of course, but it’s just becoming more and more visible.

The problem becomes that Calpers is trying to make something that is unseen (economic boost by retirees) to being seen, while ignoring the equal issue of taxpayers spending their own money. And that the taxpayers don’t give a damn about that anyway.

They care about their services.

BOTTOM LINE IS SEEN BY ALL

So you’d better be ready to explain just what people are getting for their tax dollars now. They can see that the pensions currently paid are for services not currently being provided.

They see that just fine.