Economic Volatility Hidden Societal Cost of Prevailing Approaches to Pension Reforms

1. Economic VolatilityHidden Societal Cost of Prevailing Approaches to Pension Reforms National Conference on Public Employee Retirement Systems

2. 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.

4. 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.

5. Five Reasons Why Undermining Pensions Increases Economic Volatility 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. When we dismantle pensions, we undermine the economic cushion that pension checks provide to local economies during economic downturns. 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. 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. When we undermine pensions, we exacerbate income inequality. Which in turn not only drags the economy down, but also makes it volatile.

6. Overview of Presentation What are the prevailing approaches to the so-called pension reforms? Do these reforms exacerbate economic volatility? What can we do?

7. At the national level, pension reform consist of conversion of defined benefit plans into defined contribution plans.

8. For each 1% shift to DC plans, economic volatility increases by approximately 2%

9. For each 1% shift to DC plans, financial volatility rises by 8%

10. For each 1% shift to DC plans, revenue volatility increased by 54%

11. 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)

12. Impact of Negative Pension Changes on Economic Volatility in the States, 2000-10

13. Impact of Negative Pension Changes on Revenue Volatility in the States, 2000-10

14. 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.

15. 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.

16. 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.

17. Above all, we should remember that pensions are the great stabilizer of our economy. Instead of dismantling them, we must preserve and expand them. Everyone deserves a great pension!

18. Thank you