Public pensions aren’t draining taxpayers’ wallets
By Kay Morcomb
By May 14, 2013
As a retired teacher, I live a comfortable life but not completely without economic worries. A bad accident or serious illness could wipe out my savings quickly. However, I do have a pension that I trust to keep a roof over my head and food on my table.
Why do I have that pension? Teaching is not a highly paid profession. A comparable job in the private sector would pay at least 10 percent more, but teachers accept a lower salary for the promise of a pension. [EXPAND Read more]
Our salary comes from taxpayers. Our pension largely comes from money taken from our salary throughout our teaching years and the investment earnings from that money.
Teachers are compensated by a system of defined benefits. What is a defined benefit? A percentage is taken from every employee’s paycheck, matched by employer contribution and invested by the State Board of Investments, assuring employees of a pension. Actuaries define the benefit for each individual according to how much that person paid into the system. I consider my pension as delayed salary, earned in the past and being paid now.
There is the misconception that retired teachers are living well at taxpayers’ expense. The truth is that, over the past 20 years, investment earnings are responsible for 73 percent of the revenue to pay pension benefits. Deductions from current employees make up 13 percent of pension income, and taxpayers, through employer contributions, have paid 14 percent.
The truth is, in Minnesota, all public pensions account for only 1.6 percent of state and local spending, thus not a huge drain on government resources.
The truth is the majority of Minnesota’s public-sector retirees receive modest benefits. The average monthly pension for teachers is $2,300, which is taxed.
Opponents of public pensions are scaring legislators and the public into thinking the pension systems are going broke, and taxpayer liability will increase.
The truth is, retirees work with the state Legislature to address funding shortfalls with periodic benefit and contribution adjustments. In 2010, legislative adjustments froze retirees’ benefits for two years, put limits on future benefits and made current teachers and employers pay more into the system. This already has given a $2 billion boost in assets, mostly coming from active and retired members of the system.
Opponents want to lower the interest-rate assumptions, making the pension systems look less sustainable. The truth is that interest-rate assumptions are based on long-term averages, and pension liabilities are spread over 20 to 30 years.
Opponents report on the funding problems of other states, implying those are our problems. The truth is every state has its own system. In Minnesota, appropriate funding levels have been maintained; investments have been sound, and pensions are modest. Our retirement systems are transparent in financial reporting, meeting stringent requirements set by the state. Retirees have a great interest in the sustainability of the system and work closely with the Legislature in making adjustments and sacrifices in benefits when needed.
Opponents are using new accounting rules to make defined benefits look unsustainable. Their long-term goal is to get public workers switched to a 401(k)-type retirement plan.
The truth is the transition would be very costly, and there would be great risk to both public workers and taxpayers. There would be no economic security for public workers. If investments failed and retirees lost all support, taxpayers would be providing public assistance.
Even in retirement, teachers contribute a lot to society besides their volunteer labor. The following information from the National Institute on Retirement Security should lift the spirits of all. Benefits paid by state and local pension plans support as significant amount of economic activity in Minnesota. Pension benefits received by retirees are spent in the local community. This spending ripples through the economy, as one person’s spending becomes another person’s income, creating a multiplier effect. In 2009, expenditures stemming from state and local pensions supported 41,337 jobs that paid $1.9 billion in wages and salaries, $5.7 billion in total economic output, $806.0 million in federal, state, and local tax revenues. Each dollar “invested” by Minnesota taxpayers in these plans supported $9.62 in total economic activity in the state.
The truth is we should all understand the importance of a defined-benefit pension system. [/EXPAND]