WASHINGTON — Governments can afford to deliver pensions and education if they break the habit of making frequent tax changes driven by political ideology, a study by the National Conference on Public Employee Retirement Systems has concluded.
Instead of constantly tinkering with taxes, states should focus on developing and sustaining revenue systems that are in harmony with the economy, according to “Peaceful Coexistence: The Facts About Pensions and Education Funding” (review and download the full report below). This means shifting to a tax system that is stable in economic downturns and grows in good economic times.
The paper, which was released yesterday at the NCPERS Public Safety Conference in New Orleans, explored the question of whether public pensions are “crowding out” education spending. The research shows that the notion that governments can’t afford both pensions and education is a false dilemma.
There’s a lot of polarizing rhetoric out there that presents pensions and education as an either-or proposition for state and local governments,” said Hank Kim, executive director and counsel of NCPERS.
However, he noted, the study shows that pension contributions absorb such a small part of state and local revenue that it’s ludicrous to suggest that they are crowding out a major function such as education.
The study noted that in 2016, state and local government contributions to pension plans accounted for 4.1 percent of state revenue — equaling about one-seventh of the 28.3 percent of revenue that goes to education.
Many states and localities are feeling squeezed — but the reason is their tendency to cut progressive and stable taxes such as income and property taxes in good economic times. States and localities have often filled the resulting budget gaps with regressive and risky revenue schemes such as excise taxes, casinos and lotteries.
At the same time, many public pension systems have found themselves on the chopping block as public employees and retirees are asked to accept reduced benefits in order to make up for government decisions not to honor their pension-funding commitments.
When governments constantly fiddle with and shift revenue sources, this has the unfortunate effect of rendering many tax systems regressive,” said Michael Kahn, NCPERS director of research and the study’s author.
“A healthy tax system does not require frequent changes,” he continued. “On the contrary, revenue systems should be designed to help state and local governments steadily weather the ups and downs in the economy and serve as a source of stable funding for a variety of obligations, including education and pensions.”
The 72-page study dissects a number of recent studies on whether pensions are crowding out education. It also includes a state-by-state analysis that compares each state’s expenditures on education and funding with economic and revenue trends.
The study finds that there is a disconnect in every single state between economic and revenue trends, with revenues failing to reflect and capture the benefits of steady economic growth.
The National Conference on Public Employee Retirement Systems (NCPERS) is the largest trade association for public sector pension funds, representing more than 500 funds throughout the United States and Canada. It is a unique non-profit network of public trustees, administrators, public officials and investment professionals who collectively manage more than $4 trillion in pension assets. Founded in 1941, NCPERS is the principal trade association working to promote and protect pensions by focusing on advocacy, research and education for the benefit of public sector pension stakeholders.
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Read more about public pensions in our previous coverage: