Union-Funded Study Understates Public Pension Costs

February 10, 2014

A new union-funded study understates the costs of public employee pensions while overstating the costs of corporate welfare, says Andrew Biggs, a resident scholar at the American Enterprise Institute.

  • Good Jobs First has released a new study, sponsored by unions, that claims that corporate welfare payments from states to businesses far outweigh public employee pension costs.
  • Biggs contends that corporate welfare, or crony capitalism, should be cut entirely, reasoning that cronyism is no different from deals for public employee unions.
  • But even so, the Good Jobs First report exaggerates these costs in order to claim that public pension costs pale in comparison.

The cost of a pension is a combination of "normal cost" (the contribution that a government makes to a pension fund that year) and "amortization costs" (payment for unfunded liabilities that have accrued).

  • The union-funded study did not count these latter costs, factoring in only the "normal cost" of pensions.
  • This was no mistake, and it is also not insignificant.
  • In Arizona, for example, the cost of the pension -- including amortization costs -- is 1.6 times more expensive than the "normal cost" by itself.

In all, the Good Jobs First study underestimated the cost of pensions by two-thirds.

As for corporate subsidies, Biggs agrees that the costs of such corporate welfare outweigh the benefits and should be eliminated. Even so, the study wrongly assumed that there were zero benefits whatsoever to these subsidies in order to increase the total cost.

It says a great deal about the high cost of public employee pension plans that the study went to such lengths to mask the cost of pensions and overstate the cost of subsidies.

Source: Andrew G. Biggs, "Crony Capitalism vs. Public Pensions," The American, February 1, 2014.

 

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