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National Conference on Public Employee Retirement Systems
Economic Volatility
Hidden Societal Cost of
Prevailing Approaches to
Pension Reforms
National Conference on
Public Employee Retirement Systems
1
National Conference on Public Employee Retirement Systems
Last year we looked at how the so-called
pension reforms exacerbate income
inequality and drag down our economy.
Dozens of newspapers covered
our study.
National Conference on Public Employee Retirement Systems
National Conference on Public Employee Retirement Systems
This year we look at the
relationship between pension
reforms and economic volatility
Economic volatility refers to swings in
the financial and economic system. It’s
an undesirable state of economy that
disrupts the lives of many people.
National Conference on Public Employee Retirement Systems
Five Reasons Why Undermining Pensions Increases
Economic Volatility
1.
When we undermine pensions, we undermine financial and economic stability provided by
pension funds during economic and financial downturns due to their long-term investment
horizon.
2.
When we dismantle pensions, we undermine the economic cushion that pension checks
provide to local economies during economic downturns.
3.
When we convert DB into DC plans, we increase the probability of irrational rise in asset
prices/bubbles by forcing people with little or no investment knowledge or experience to
make investment decisions that were made for them by pension boards and professionals.
4.
When we shift people to DC plans, we expose them to the economics of manipulation and
deception. In a free market, there is not only freedom to choose, but also freedom to be
fooled and caught-up into buying things and financial products we may not need or
understand.
5.
When we undermine pensions, we exacerbate income inequality. Which in turn not only
drags the economy down, but also makes it volatile.
National Conference on Public Employee Retirement Systems
Overview of Presentation
What are the prevailing approaches to the socalled pension reforms?
Do these reforms exacerbate economic
volatility?
What can we do?
National Conference on Public Employee Retirement Systems
At the national level, pension reform consist
of conversion of defined benefit plans into
defined contribution plans.
National Conference on Public Employee Retirement Systems
For each 1% shift to DC plans, economic volatility increases by approximately
2%
National Conference on Public Employee Retirement Systems
For each 1% shift to DC plans, financial volatility rises by 8%
National Conference on Public Employee Retirement Systems
For each 1% shift to DC plans, revenue volatility increased by 54%
National Conference on Public Employee Retirement Systems
At the state and local level pension reforms consist of
the following negative pension changes:
• 34 states increased employee contributions
• 38 states instituted higher age and service requirements for
retirement
• 30 states reduced COLAs
• 18 states instituted steps to convert DB plans into DC or
Hybrid Plans (Mandatory Hybrid – 6 States, Mandatory Cash
Balance – 3 State, Mandatory DC – 2 States, and Choice of
Plan – 7 States)
National Conference on Public Employee Retirement Systems
Impact of Negative Pension Changes on Economic
Volatility in the States, 2000-10
Variable
Regression Coefficient
Intercept
2.791
Negative Pension Changes
0.105
Income Inequality
1.731
Regressivity of Tax System
0.314
Public Employees
1.111
National Conference on Public Employee Retirement Systems
Impact of Negative Pension Changes on Revenue Volatility in
the States, 2000-10
Variable
Regression Coefficient
Intercept
24.789
Negative Pension Changes
0.651
Regressivity of Tax System
13.099
Public Employees
-3.376
National Conference on Public Employee Retirement Systems
Bottom line
• Analysis of empirical data shows that the
prevailing so-called pension reforms increase
economic volatility.
• When economic volatility rises, everyone
suffers, not just public employees or those
who have defined benefit pensions.
National Conference on Public Employee Retirement Systems
What Can We Do?
For starters, policymakers should pay serious attention to the
hidden economic cost to taxpayers before they dismantle
public pensions.
Instead of dismantling pensions, state and local governments
should close tax loopholes and corporate subsidies first.
Compare: taxpayer money given to global corporations through
loopholes and subsidies often ends up in overseas tax havens,
while pension checks are spent in local economies.
National Conference on Public Employee Retirement Systems
In closing, there are a lot of numbers
in our research, but we should never
forget that each number represents
a real person whose life is turned
upside down by these so-called
pension reforms.
National Conference on Public Employee Retirement Systems
1. Above all, we should remember
that pensions are the great
stabilizer of our economy.
2. Instead of dismantling them, we
must preserve and expand
them.
3. Everyone deserves a great
pension!
National Conference on Public Employee Retirement Systems
Thank you