What do you call a cost-benefit analysis that doesn’t include any costs? “Colorado PERA Fiscal Impacts,” a study claiming that retirement benefits paid by PERA create “$5.2 billion in output and help sustain 29,357 jobs.” This study, which was commissioned by PERA at a cost of $25,000, is economically meaningless propaganda. It literally conveys no information of value to anyone. But the worse part is that PERA managers and trustees might be naïve enough to believe it is true.
With PERA’s finances in the news, a study like “Colorado PERA Fiscal Impacts” will generate attention. And the idea for this “pensionomics” study didn’t come to PERA out of thin air. The public pensions industry, consisting of public plans and the consulting, investment and actuarial firms they support, have for several years commissioned studies claiming that pension benefits boost the economy and support jobs and tax revenues.
The logic of these studies is simple: PERA pays out benefits to retirees. Retirees spend that money on, say, food, housing, and medicine. The grocers, home builders or health care providers who receive retirees’ money respend it, and so on down the line. Thanks to this “multiplier effect,” a single dollar of PERA benefits creates $1.48 in economic activity, creating thousands of jobs and $267 million in tax revenues throughout the state. “To measure the multiplier effect,” the PERA study says, “sophisticated mathematical procedures are created to track the flow of dollars through an economy.”
But what the PERA study needs is a much simpler mathematical procedure called “counting both sides of the equation”: in other words, it needs to count economic costs as well as economic benefits. Sure, PERA retirees spend their benefit checks and that spending creates economic activity. But every dollar of PERA benefits comes from a dollar that taxpayers or government employees contributed to the program or from the interest earned on those contributions. Had those PERA contributions not been made, public employees and taxpayers would have had more money in their pockets. When they spent those dollars, the same economic multiplier effect would apply.
So, the economic costs of supporting PERA are just about equal to the economic benefits of the checks PERA writes to retirees. It’s a wash. That’s not to say PERA is a bad program. It’s just to say that it’s not magic. A quality university or public policy journal wouldn’t give this study a second look because it ignores the essential tradeoffs between costs and benefits that are central to policymaking.
Instead of talking up a bogus economic study, PERA’s managers should be working to address the program’s financing. Lawmakers made excessively generous benefit promises back in the 1990s and today are unable to fully fund them. PERA is only 61 percent funded and state and local governments haven’t made their full annual contributions in over a decade. PERA’s trustees are taking increasing investment risk, with nearly three-quarters of PERA’s assets held in stocks, real estate and “alternative investments.” But greater investment risk leads to greater volatility of required contributions, which already have more than tripled over the last decade. PERA’s economic study is a sideshow that distracts from the real issues.
But here’s the danger: that PERA’s $45 billion fund is being overseen by managers who lack the instinct to say “huh?” when presented with a study that looks much too good to be true. If PERA could magically create billions of dollars in GDP and tens of thousands of jobs for Coloradans, we could support the entire economy by paying ourselves pension benefits.
But paying each other pension benefits we can’t afford isn’t the road to economic prosperity. It’s the road to Illinois.
Andrew G. Biggs is a resident scholar at the American Enterprise Institute. Previously , he was the principal deputy commissioner at the Social Security Administration, and in 2013-2014 he served as co-vice chair of the Society of Actuaries Blue Ribbon Panel on Public Pension Funding.
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