Fiscal policy boosted U.S. GDP growth by 8.5 percentage points at an annual rate in the first quarter of 2021, the Hutchins Center Fiscal Impact Measure (FIM) shows. The FIM translates changes in taxes and spending at federal, state, and local levels into changes in aggregate demand, illustrating the effect of fiscal policy on real GDP growth. GDP rose at an annual rate of 6.4% in the first quarter, according to the government’s latest estimate.
The boost to economic growth in the first quarter from fiscal policy is largely the result of two rounds of rebate checks (the $600 per person from legislation enacted in December that was paid in January, and the $1,400 per person from the American Rescue Plan Act that was paid in the last few weeks of March). An uptick in purchases by the federal government, reflecting in part spending on vaccines and processing of Paycheck Protection Program loans, also boosted economic activity.
Author(s): Manuel Alcala Kovalski, Sophia Campbell, Tyler Powell, Louise Sheiner
Publication Date: 1 June 2021 (most recent data update)
“Given other demands, fully funding their pension plans might not be the right thing for state and local governments,” Sheiner said in an interview with The Brookings Institution. “They should compare the benefits of upping their pension investments with the benefits of investing in their people.”
Most research evaluates state and local pension plans on the assumption they should be fully funded—that is, their assets are sufficient to meet all anticipated obligations to current and future retirees. State and local pension plans, benefiting more than 11 million retirees, hold nearly $5 trillion in assets and, according to a recent estimate cited in the paper, would require an additional $4 trillion to meet all of their obligations.
However, in The sustainability of state and local government pensions: A public finance approach, the authors observe that, using the types of calculations that economists recommend, state and local pension plans have never been fully funded—meaning that they have always been implicitly in debt. Furthermore, they show that being able to pay benefits in perpetuity doesn’t require full funding. If plans contribute enough to stabilize their pension debt, that is enough to enable them to make benefit payments over the long run.
Author(s): Jamie Lenney, Byron Lutz, Finn Schüle, Louise Sheiner
Governments “don’t have to pay off their debt like a household does,” said Louise Sheiner, policy director for the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. “They can just keep rolling it over. They’re never going to go out of business and have to pay all at once.”
Sheiner is co-author, along with Jamie Lenney of the Bank of England, Byron Lutz of the Federal Reserve Board of Governors, and Brown University’s Finn Schüle, of Sustainability of State and Local Government Pensions: A Public Finance Approach, which was presented at a Brookings conference in March.
State and local liabilities can also be likened to the federal government’s deficit and debt, Sheiner said in an interview with MarketWatch. Most economists think that as long as those numbers stay constant as a share of the economy, it’s not problematic.
As routine as the changing of the seasons, every year, Truth in Accounting (TIA) produces a new report which declares that taxpayers across the country will somehow have to foot a huge tax bill immediately to pay for their state’s unfunded pension liabilities. However, a recent working paper from the Brookings Institution shows this is not a truthful depiction of how public pension funding works.
TIA often argues that taxpayers are responsible for paying their city and/or state’s unfunded liabilities in a few ways. First, if a pension isn’t at 100% funded status in the course of a given year, they state that the pension is somehow in grave jeopardy and that its unfunded liabilities need to be paid immediately to ensure the pension is “debt-free.” They then calculate a supposed “taxpayer burden,” or an amount each taxpayer will have to pay to meet their state or local pension’s unfunded liabilities.
These tactics, which are often amplified by news outlets critical of public pensions such as the Center Square, are designed to elicit fear that taxpayers will have to fork over a large bill at some point in the future for their area’s pensions.
Author(s): Tristan Fitzpatrick
Publication Date: 2 June 2021
Publication Site: National Public Pension Coalition
In this paper we explore the fiscal sustainability of U.S. state and local government pensions plans. Specifically, we examine if under current benefit and funding policies state and local pension plans will ever become insolvent, and, if so, when. We then examine the fiscal cost of stabilizing pension debt as a share of the economy and examine the cost associated with delaying such stabilization into the future. We find that, despite the projected increase in the ratio of beneficiaries to workers as a result of population aging, state and local government pension benefit payments as a share of the economy are currently near their peak and will eventually decline significantly. This previously undocumented pattern reflects the significant reforms enacted by many plans which lower benefits for new hires and cost-of-living adjustments often set beneath the expected pace of inflation. Under low or moderate asset return assumptions, we find that few plans are likely to exhaust their assets over the next few decades. Nonetheless, under these asset returns plans are currently not sustainable as pension debt is set to rise indefinitely; plans will therefore need to take action to reach sustainability. But the required fiscal adjustments are generally moderate in size and in all cases are substantially lower than the adjustments required under the typical full prefunding benchmark. We also find generally modest returns, if any, to starting this stabilization process now versus a decade in the future. Of course, there is significant heterogeneity with some plans requiring very large increases to stabilize their pension debt.
Author(s): Jamie Lenney, Bank of England Byron Lutz, Federal Reserve Board of Governors Finn Schüle, Brown University Louise Sheiner, Brookings Institution
Their findings, however, imply that many state and local governments may be able to spend more than assumed on improving their educational systems and economically important infrastructure.
“Given other demands, fully funding their pension plans might not be the right thing for state and local governments,” Sheiner said in an interview with The Brookings Institution. “They should compare the benefits of upping their pension investments with the benefits of investing in their people.”
Author(s): Jamie Lenney, Byron Lutz, Finn Schüle, Louise Sheiner
