Public pension costs do not crowd out education spending, according to a new study by the National Conference on Public Employee Retirement Systems (NCPERS). Instead, the real funding squeeze is caused by frequent tax changes that destabilize state and local government revenue.
"Pension contributions are such a small part of state and local revenues that they cannot possibly crowd out a major state function such as public education," according to the October 2019 study, "Peaceful Coexistence: The Facts about Pensions and Education Funding."
"Instead of blaming public pensions for state and local budget problems, opponents of public pensions need to focus on modernizing and reforming state and local revenue systems," said NCPERS Director of Research and Education Michael Kahn, who wrote the study.
In 2016, state and local governments spent about 4.1% of revenue on pension contributions while spending 28.3% of revenue on education, the study found. From 1993 to 2016, education spending increased significantly nationwide to nearly $1 trillion, while total public pension spending increased at a much lower rate to about $140 billion.
If pension spending was crowding out education spending, the trend lines of education expenditures and pension contributions would be on a path to convergence, the study concluded. Instead the lines have been moving farther apart nationally with education funding increasing much more significantly than pension funding.
The study also noted that most of the money for public pension funds comes from employee contributions and investment earnings. Indeed, at NYSTRS, 87% of pension revenue over the past 30 years has come from member contributions and investment earnings.
Kahn said the public funding crunch was not due to pensions, but to problems with how state and local governments generate revenues. "State and local budgets are under constant stress – not because spending is too high, but because revenues are too low to fund vital public services," he said.
"States have cut progressive and stable taxes, such as income and property, in good economic times and have filled the budget gaps with regressive and volatile revenue sources, such as casinos and lotteries, excise taxes and user fees," Kahn said in the study.
This practice means revenues can’t keep up with funding needs and "shifts the burden of taxes to those who don’t have much money – especially low- and middle-income people who live paycheck to paycheck," the study said.
An October 2018 study by the Institute on Taxation and Economic Policy (ITEP) found that when all taxes, including income, sales, property and excise taxes, are added up, the lowest 20% of income earners pay $11.40 in taxes out of every $100 of their income while the top 1% of earners pay $7.40 in taxes.
"A good tax system should not require frequent changes," the NCPERS study said. "It should be stable in bad economic times and grow in good economic times."