Debunking the “Crowding Out” Myth About Pensions

By Brian Rice, President of the Sacramento Area Firefighters 

When they announced their ballot measure last week, critics of public employee retirement benefits engaged in hyperbole and pointing to potholes as evidence that millions of elderly Californians should be stripped of their retirement savings. Cities, they claim, are spending so much on retired police officers, firefighters and other employees that services – such as filling potholes or maintaining parks – are getting “crowded out.”

The pothole meme is getting lots of attention because the New York-based Manhattan Institute, funded by the right-wing Koch brothers, recently issued a report predicting a dark Golden State future where community needs are crowded out by pension costs. I’m not suggesting that billionaires aren’t genuinely concerned with the quality of California’s roads. Their limousines must drive the same streets as the working class. What I take issue with is their economics. The “crowded out” argument just doesn’t add up.

Virtually everything public agencies do, from filling potholes to putting out fires, requires people. The cost of retirement is one aspect of total compensation, and public employees have traded off other compensation in order to have a secure retirement. The fact is, employees have bargained to increase their own contributions and forgo raises to ensure a secure retirement package.

When we pay retired workers a pension, they don’t stick that money in a mattress. They spend it on housing, food, gasoline, other necessities, gifts for the grandkids and more – which drives economic activity, creates jobs and increases tax revenues.

Each year, the $13 billion that much-maligned CalPERS pays Californians in pension payments creates $30.4 billion in economic activity. The California Public Employees’ Retirement System also invests in big infrastructure projects for the state, and makes capital available to minority, low-income and rural communities. These are the very projects that pension critics say will be “crowded out.”

The numbers are also strong for CalSTRS, California’s teacher retirement system. A study by the University of the Pacific found that CalSTRS payments generate an $11 billion boost to the economy.

In addition, municipal budgets are bouncing back from the recession. In Los Angeles, Mayor Eric Garcetti’s new $8.6 billion proposal has more money for tree trimming, anti-gang initiatives and more. Fresno and Sacramento have boosted police and firefighter staffing. Even in San Jose, home of former Mayor Chuck Reed, pension-cutter-in-chief, there’s a budget surplus.

Public employees understand that they have a role in their city budgets, and they’re doing their part. Since Gov. Jerry Brown and the Legislature enacted pension changes in 2012, employees have been contributing more to their pensions. As of January 2013, newly hired employees automatically contribute 50 percent of pension costs and have to retire later. New classifications of employees are contributing more, and negotiations between local governments and unions are ongoing.

The solution isn’t to strip hardworking people, on the cusp of retirement, of money they and their employers saved together for decades. That’s what pension reformers are proposing this go-round, but what does it get us? Hundreds of thousands of impoverished, elderly Californians who must rely on state services.

That just doesn’t make sense. What does make sense is funneling billions into California’s economy, by paying the pensions. Don’t worry about the potholes – worry about California’s middle class being “crowded out.”