Each month the California economy experiences a large stimulus and the positive jolt is barely felt or acknowledged by civic, political or media leaders. But hundreds of thousands of citizens and many local businesses anticipate and welcome the infusion of money. The stimulus is monthly government pension payments, which is a contributor on par with the State’s largest industries. This stimulus is an approximately three billion dollar monthly payroll. That’s three with nine trailing digits, one hundred and fifteen times larger than the twenty six million dollar payroll of the sought after Tesla battery factory and larger than the Central Valley’s agricultural payrolls. If this economic powerhouse was more obvious, there isn’t a political office holder who wouldn’t desire to be associated with its influence.
Well the good news is the approximately thirty six billion dollar annual stimulus is real, is here and lifting all California economic boats. But a disappointing and myopic political discourse is damping our children’s and grandchildren’s opportunity of fully reaping this same reward from seeds planted today. The stimulus I am describing is pension payments. What pension naysayers fail to acknowledge is a tremendous economic contributor to California?
I have been dismayed by the continual public discussion of government pension problems from commentators with limited understanding of the structure, policies, and purpose of advance funded pension systems. As a thirty five year participant administering pension plans, I believe my perspective can expand the conversation. I want to illuminate the significant aspect of pension plans left out of the public discourse. Let it be known, there is a tremendous positive impact on the California economy of current pension payouts. The payouts equal or exceed the contributions to pension plans made by taxpayers each year. Stated differently, advance funded pension plans pay for themselves. The contributions to pension systems have been the single topic of recent blinkered and political self-serving complaints concerning public pensions. But the full economic impact, both inflow and outflow, of California pension plans should be understood.
The partially informed criticism concerning pensions and government budgets that has transpired since the Wall Street induced economic recession has unduly emphasized the short term cost of pensions, while failing to recognize and commend the more powerful long term benefits. This is a one sided limited conversation that could lead to poor public policy decisions. A balanced analysis is needed for a better understanding of how an advance funded pension plan is a huge contributor to the economic environment in which it operates.
Of the approximately three billion dollars a month injected into the California economy by government pensions; sixty seven percent is new money obtained from thirty to forty years of investment growth, twelve percent is savings contributed by employees from their own paychecks over a long career and twenty one percent is the employer portion of contributions over the same period. Over two billion dollars of monthly pension payments, representing investment earnings, introduced each month into the California economy is new money circulated and helping all Californians with no burden on taxpayers. It’s a steady monthly inflow obtained from global investments, brought back to California and spent at auto repair shops, home improvement centers, tuition for grandchildren, hair salons, rent, and at a thousand other small and large businesses. There are many businesses that count on this monthly injection and they know how critical it is to their continued prosperity. At the risk of over using an old proverb, pensions are the geese that lay the golden eggs. The geese that many people, who possess pension envy and short term economic thinking, are attempting to kill or at least maim.
But investment earnings are not the only benefit accruing to Californians. The twenty one and twelve percent contributed portions of pension payments provide a second impact to the California economy. Californians benefit once from the services provided by employees during their working life and a second economic impact when a portion of that compensation was saved in pension plans and recirculated many years later. Additionally, the economic ripple effect of three billion dollars of direct spending at California businesses compounds the beneficial impact.
The current issue of too generous pension benefits being publically discussed is valid and should be debated, but with full knowledge of how pensions are designed. Excessive benefit formulas should be questioned, including whether recent legislation has brought them to a reasonable component of total compensation. But the structure and strategy of a defined benefit plan cannot be debunked. It is a social benefit that should be available to all Americans in both private and public employment to assure a stronger American economy and social stability.
A realistic conversation should focus on what is fair compensation for the work provided by teachers, police, those who assure clean water and air, public workers who care for our disabled and infirm and all the others who help maintain a civil society. Focusing on a single aspect of compensation – pension benefits- diverts analysis from complete staff cost and detracts from the value and beautiful design of an advanced funded pension plan. In fact, the pension contribution portion of an employee’s total wage package is the wisest component of all forms of compensation. It returns many fold over to assist future Californians. If compensation is viewed in whole by local and state government elected officials and felt to be excessive, any reductions would wisely be in the immediately consumed portion of wages rather than the portion of compensation that most benefits the long term health of the California economy.
Why California public pensions, for over eighty years, have contributed so much to the economy and provided security for older residents is attributed to three primary reasons. (1) Sound actuarial policies are used to design the plan’s structure and the integrity of the actuarial practices has been maintained over the long life of each pension plan. The histories of these practices and principles have proven themselves as valid. (2) Top notch investment management by professionals who are not motivated by the fees and margins inherent in other investment options that have Wall Street’s imprint. (Read 401 K’s and IRA’s) When contributions are aggregated into large pools many attractive investment opportunities become available. Opportunities closed to one small government or a single individual. (3) Trustees who consistently practiced sound fiduciary principles to protect the pension plan from continual attempts to divert the plan’s money to political opportunities or personal gain. Consistent savings, prudent investment, and a vision to stay the course is the recommendation consistently espoused by every financial planner and the hallmarks of California pension plans.
Some contend that the current cost of pensions is not sustainable without sacrificing other public services. Again, the issue is not the cost of pensions but is the compensation of government employees fair? Pensions are just a slice of the total compensation package. But it is the slice that is returned to California many times over. A long term perspective would argue the pension slice of compensation may be the cheapest component when the payback is part of the equation. Also the amount of financial savings that would accrue to each government or individual by reducing pension contributions would be insufficient to make a dent in reducing tax rates, building public infrastructure, or expanding educational and social services. Insignificant cutbacks today or large benefits tomorrow?
Pension contributions have been proven, over eighty years, to be economic winners following principles advocated by every financial guru on the planet. So let’s have a realistic conversation of public employee compensation and understand the impact of each of its components.