Sunday, January 3, 2016

Here is public pension fallacy #10

I spent a large part of my early career working on the public pension issue, especially as it relates to public-sector compensation. During that time, I encountered a number of fallacious talking points -- some transparently false, others having a surface plausibility -- which pension advocates frequently deploy.

Not actually where pension funds come from.
A few years ago I put together a paper that lists and responds to each of the fallacies. It's had some staying power. Even after my Heritage Foundation exit and subsequent inability to promote my pension work, the paper gets passed around and cited fairly often. It even appeared on the list of the top ten most-read Heritage papers for much of 2015. Here are the nine fallacies:
Fallacy 1: The average public pension payment reflects the generosity of the plan’s benefits.

Fallacy 2: The cost of a public pension plan is equal to whatever the government contributes to the pension fund each year.

Fallacy 3: Public pension plans can “assume away” risk because governments are long-lived.

Fallacy 4: Advocates of risk-adjusted discounting are merely a niche group of contrarian economists.

Fallacy 5: Critics of public pension accounting assumptions are projecting low rates of return.

Fallacy 6: The investment returns earned by a pension fund pay for most pension benefits, so taxpayers are actually charged very little.

Fallacy 7: Public pensions are not overly generous because they are simply deferred compensation.

Fallacy 8: Generous pensions are necessary because some government employees do not participate in Social Security.

Fallacy 9: Closing a public pension carries major transition costs.
Click the link above to read concise responses to each of these fallacies.

For reasons that were never clear to me, a tenth fallacy included in my manuscript did not survive the publication process. So here is the original text of what I'll now call public pension fallacy #10:
Fallacy 10: Pension payments serve as a tremendous economic stimulus.

The National Institute on Retirement Security (NIRS), a public pension advocacy group, publishes studies that purport to show the stimulus effects of pension benefits. Its latest report states that $2.37 in economic activity is generated for every dollar distributed via pension checks. The NIRS report has spawned numerous state- and local-based stimulus studies that make similar claims.

But all of these claims are empty of any policy relevance. The stimulus effects are based on the uncontroversial notion that economic activity (such as paying pension benefits) begets further economic activity. The fallacy is in ignoring what economic activity would be generated by taxpayer money if it were not diverted to pensions in the first place. As the NIRS study acknowledges, the stimulus effects it cites are the gross economic impacts of pension benefits, not taking into account the de-stimulative effects of moving employee and taxpayer money out of the economy and into the pension plans. 

If public pensions did not exist, the money otherwise used to fund them might be spent in ways that are at least as stimulative as NIRS claims pensions to be. For that reason, the stimulus studies published by NIRS tell us nothing about whether pensions are good economic policy.
For an expanded discussion, see my piece with Andrew Biggs, "Public Pension Stimulus Nonsense."

Despite regular debunkings, NIRS has continued to issue an annual report dedicated to the stimulus fallacy. Each new report uses the same methodology, with no acknowledgement of the criticism the previous one invariably gets. It's not so much research as it is propaganda.

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