How Public Pension Plans Help Drive the Economy

Video Transcript

The primary mission of the New York State Teachers' Retirement System is to provide retirement benefits to state educators. But did you know those payments provide much of the fuel that powers New York's economic engine? And considering the financial challenges our state is now facing, public pension dollars are more important than ever.

In all, NYSTRS paid out more than $5 billion in benefits for the fiscal year ended June 30, 2009. Of that total, more than $4 billion were paid to people living in New York. Those payments created a ripple effect through the state economy, as one person's spending became another's income.

According to a study by the non-profit National Institute on Retirement Security, each dollar "invested" in public pensions by New York taxpayers supports nearly ten dollars in total economic activity. In 2006, that translated into $16.4 billion spent on goods and services provided by New York businesses.

The report adds that retiree expenditures from New York state and local pension benefits supported nearly 137,000 in-state jobs in 2006, accounting for $10.5 billion in wages and salaries. Pension payments made to New York residents also supported a total of $4.1 billion in revenue to federal, state and local governments.

It also bears noting a NYSTRS benefit provides a guaranteed income for life. Retirees who rely on a 401-k style defined contribution plan face the very real possibility of outliving their savings – particularly when faced with market losses like those in 2008. In cases where savings dry up, retirees generally turn to taxpayer-funded public assistance to make ends meet.

According to NIRS, defined benefit pensions like NYSTRS' mean 1.72 million fewer poor households nationwide and 1.35 million fewer households receiving public assistance.

In reality, benefit plans like NYSTRS actually save taxpayers money. According to another NIRS study, the economic efficiencies of DB plans make them nearly half the cost of 401-k style plans.

For example, DB plan assets are professionally managed at significantly lower fees. Statistics show the cost to manage a 401-k style DC plan is anywhere from $1.25 to $2.00 per$100 of assets. These appear as "fees" in benefit statements. By comparison, the median cost to manage that same $100 in a DB plan is 10 cents. NYSTRS does it even more cost effectively– about 7 cents per $100 of assets.

Add to this the fact that DB plans historically achieve higher investment returns than DC accounts and you begin to see why a NYSTRS-style benefit is a better buy for New York's taxpayers. According to NIRS, a simple 1% difference in annual investment returns results in a 26% cost savings over a working career.

These lower management fees and higher investment returns keep costs to taxpayers reasonable. NYSTRS employer contribution rates, for example, have been in the single digits for 21 consecutive years. In six of those years, the rates were below 1.5%.

Through it all, NYSTRS has remained well funded. This means there are enough assets to pay all current and future benefits owed to the System's nearly 140,000 retired members. It also means monies are on hand to pay the accrued benefits of NYSTRS almost 300,000 active members.

The vast majority of funds used to pay public pension benefits come from investment returns, not taxpayer funding. In the most recent 20-year period, investment income accounted for 86% of NYSTRS income. Additionally, many active members are required to contribute 3% of salary toward their retirement.

For the 20-year period ending June 30, 2009, NYSTRS collected $13.3 billion in member and employer contributions. During the same period, NYSTRS paid out $53.5 billion in benefits. At the same time, the market value of System assets rose from $30 billion to $72 billion.

NYSTRS is a long-term investor with the ability to pool funds and achieve cost efficiencies an individual investor simply cannot match. And, because the plan exists across generations, it is less sensitive to market fluctuations than 401-k plans. In other words, because there is no need for us to "chase returns" to meet our financial obligations, we can consistently employ investment strategies which provide optimal long-term returns.

History shows when it comes to investing, patience truly is a virtue. Over the past 80 years, markets have nearly always followed a steep decline with a strong rebound. And NYSTRS is poised to once again capitalize on the economic recovery.

For all these reasons and more, a NYSTRS pension makes good economic sense for all New Yorkers.

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