Teachers have a special place in his heart. He believes that education is a “less rigorous course of study” than other majors; that teachers “enter college with below-average SAT scores but receive much higher GPAs than other students;” and that a degree in education “simply does not reflect the same underlying skills and knowledge” as a degree in other areas. Indeed, he says that “When we compare salaries based on objective measures of cognitive ability — such as SAT, GRE, or IQ scores,” teachers are not only paid too much, but they earn more than they would likely receive in the private sector given their skill sets.
Now Biggs is focusing on what he refers to as the “pension industrial complex.”
No, I am not making this up.
First, in a May 3rd op-ed on the website “Real Clear Markets” entitled “Public Pension Stimulus Nonsense,” Biggs takes on the National Institute on Retirement Security (NIRS) and the pension administrators who belong to it. He labels as “nonsense” the NIRS “Pensionomics” research that shows how each dollar of pension benefits produces $2.37 in economic output, creating millions of new jobs and billions in additional labor income. According to Biggs, the NIRS research is “faulty” and, worse yet, pension administrators across the country are publishing their own localized versions of “the NIRS fallacy.” Instead, Biggs asserts that “the net economic impact of pension benefits is roughly zero.”
(He might want to point out similar “faulty’ reasoning to his friends at the U.S. Chamber of Commerce, who recently noted, in their White Paper entitled “Private Retirement Benefits in the 21st Century: A Path Forward,” that defined benefit plans are “an integral part of the national economy,” paying out over $167 billion in retirement benefits in 2009.)
Biggs concludes his May 3rd piece by explaining to his readers that pension administrators should be “apolitical public servants,” but that instead they are fighting “tooth and nail to preserve the existing pension systems, advancing dubious arguments along the way.” I presume that the last several years of major legislation in over 80% of the states making substantial reforms to pension systems -- in many cases accomplished at the behest of or in cooperation with pension plans and their administrators -- is to be ignored.
But Biggs has not gone unchallenged. NIRS quickly responded with a post entitled “Perfect Sense” on their website that reiterates that using U.S. Census Bureau data and an economic analysis modeling software widely used by industry and governments analysts, their “Pensionomics 2012” demonstrates that public and private sector pension benefit expenditures supported more than $1 trillion in total economic output in 2009. Moreover, these defined benefit pension expenditures supported some 6.5 million American jobs that paid nearly $315 billion in income to other Americans.
NIRS executive director, Diane Oakley, argues that “What doesn't make sense is the nation's broken retirement infrastructure.“ She underscores that when older Americans are unable to support themselves, it is inevitable that they will need financial assistance from families or turn to public assistance to meet their basic needs. “It makes perfect sense that the lack of pensions and retirement insecurity are the issues we should be attacking,” she concludes.
Dean Baker, an economist and the co-founder of the Center for Economic and Policy Research (CEPR), also responded to Biggs’ piece on the CEPR blog, noting that NIRS’ claim that the economy gets $2.37 of additional output for each dollar of pension spending due to the multiplier effect of spending is not unreasonable. Baker points out that the Congressional Budget Office's estimates of multipliers for the category that includes pensions has a top range of $2.10 per dollar of spending, suggesting that “NIRS was in the ballpark.” Baker said that Biggs’ criticism fails to take into account that during a recession, the lack of demand is the real culprit facing the economy, and anything that creates demand – including pension spending -- would in fact increase growth and jobs.
Finally, Monique Morrissey, an economist with the Economic Policy Institute (EPI), joined in the criticism of Biggs. In a post on the EPI blog entitled “Andrew Biggs is at it again,” Ms. Morrissey notes that Biggs’ real goal is to increase savings in private accounts. However, when promoting President George W. Bush’s plan to partially privatize Social Security, Morrissey points out that Biggs did not take into account the cost in the form of reduced guaranteed benefits, which is similar to the “sin” which he accuses NIRS of committing.
Despite these critiques, Biggs was at it again later in the month, this time in AEI’s online magazine, “The American,” with an article entitled “Public-Sector Pensions: The Transition Costs Myth” on May 21st. In this piece, Biggs begins by stating that public-sector employees and “the pension industrial complex” – which he describes as plan managers, pension actuaries, and investment advisors -- do not like DC plans and are using “deceptive and self-serving arguments despite having an obligation to provide the public with solid facts.” In effect, we are all liars.
This time around, Biggs is complaining about the “novel” argument that “DB pensions’ massive unfunded liabilities create ‘transition costs’ that make shifting to DC plans unfeasibly expensive.” In other words, according to Biggs, “the more broke DB plans become, the more we have to stick with them.”
Biggs refers to a new report by University of Arkansas economist Bob Costrell for the Laura and John Arnold Foundation that argues that these transition costs are largely a myth. Costrell says that the assertions by plans and others that the Governmental Accounting Standards Board (GASB) rules allow an open plan to amortize unfunded liabilities over a period of 30 years, but require a closed plan to amortize its unfunded liabilities more quickly – thus creating a temporary period of higher pension amortization costs, termed the “transition cost” – are simply not true.
On the contrary, Costrell says that if a government wishes to follow their current amortization schedule even as they shift to a DC plan, there is “nothing whatsoever preventing them from doing so,” and that some states that have moved to DC pensions have done exactly that. In short, GASB rules don’t govern funding, just accounting and disclosure. Thus, Biggs claims that having new employees participate in a new DC pension makes no difference to what the old DB plan owes.
As usual, Biggs also takes some time in this op-ed to argue the desirability of DC plans over DB plans, underscoring that an “essential difference between traditional defined-benefit (DB) pensions and newer 401(k)-style defined-contribution (DC) plans is that DC plans can’t generate unfunded liabilities.” Under a DB plan, Biggs explains, the employer promises employees a fixed retirement benefit regardless of how the plan’s investments fare. “In a DC plan, by contrast, employers promise employees a fixed contribution, say, 5 percent of salary.” As Biggs stresses, “Once that contribution is made, the employer’s obligation is fulfilled.” In other words, that’s that, and let the chips fall where they may.
Once again, Biggs – and the Arnold Foundation report it references -- did not go unanswered. NIRS issued a “Members’ Alert” on May 18th that referred to their ”Look Before You Leap” research and said that Costrell's paper fails to appropriately address the full context of this NIRS research, as well as the subsequent NIRS research on the effectiveness of sound actuarial practices in assuring well-funded DB plans.
According to NIRS, to suggest, as Costrell and Biggs do, that government officials simply ignore appropriate actuarial analysis of benefit and design changes “can result in ill-informed policy decisions that increase costs and undermine the efficient delivery of public services.” Making sure that the appropriate amortization is attached to pension reform options “provides clarity not confusion,” says NIRS’ Diane Oakley. “Moreover, the pension reform decisions must also address other important factors, such as economies of scale, transition costs, and the eventual investment returns,” she reminds her members.
Keith Brainard, the Director of Research for the National Association of Retirement Administrators (NASRA) also prepared a memorandum to NASRA members offering his perspectives on the Arnold report and the Biggs assertions related to it. In this memo, Mr. Brainard explains that even though policymakers may determine the period and basis with which to amortize unfunded pension liabilities, without regard to GASB standards, there are nevertheless “sensible reasons… to consider pension reforms in terms that comply with the sound actuarial principles on which these GASB standards are based.” He also notes that constitutional and statutory provisions in many states require policymakers to apply amortization periods that are consistent with the actuarial principles contained in the current GASB standards.
Keith concludes by stating that the impact of a change in amortization policy is only one of many factors policymakers must consider when evaluating pension reform. “Although GASB standards do not directly tie the hands of governmental plan sponsors,” Keith acknowledges, “the principles on which these standards are based are primary considerations and should, with cost and other analyses, be calculated for policy makers to determine the full impact of retirement plan changes.”
Finally, Gary Findlay, the Executive Director of the Missouri State Employees’ Retirement System (MOSERS), responded to Biggs’ article with a post on “PensionDialog.” In it, Mr. Findlay argues that the so-called “myth” to which Biggs refers is not whether transition costs exist, but how governments must finance them. “I agree that governments can mortgage added costs in any number of ways,” Gary states, “What seems to be completely lost is the fact that closing a defined benefit pension plan and setting up a 401(k)-style plan doesn’t change the unfunded liability, and often increases other costs,” he warns.
Gary also comments on Biggs’ statement that DC plans can’t generate unfunded liabilities. He points out that participants in such plans have nowhere near the amount that will be needed to provide anything close to a subsistence level of retirement income, and that the difference between what participants accumulate and what they need to survive is an unfunded liability that is going to fall on someone. Employers, Gary notes, will ultimately be on the hook for the financing of entitlement programs needed to fill the gap. “By any reasonable assessment, that is an unfunded liability,” he concludes.
Biggs responds, and then Gary responds to the response. Needless to say, neither ends up agreeing with the other. Biggs does offer up a few of what I refer to as “Huh?” moments. For example, he thinks it inappropriate to talk about DC plans generating “unfunded liabilities,” saying it is not “a plausible use of the term,” and would prefer instead to talk about “savings shortfalls.” Call it what you will, the consequences are still going to ultimately fall on the employer, aren’t they?
But why quibble over terminology? After all, Biggs argues that “a lot of talk about a retirement savings crisis is far overblown.”
Most recently, Biggs has appeared in a May 28th article in “Pensions and Investments” entitled “Cash Balance Plans Gain Favor As Option Among Public Pension Funds.” Biggs acknowledges the advantages of cash balance plans, but is still pushing for a DC approach. “The idea that it is more expensive because of transition costs (is) really just a BS excuse to not reform your pension,” he once again asserts.
Biggs also says that a big issue is that DC plans can't match “the generosity in contributions to DB plans.” “DB plans are scary generous,” he warns. A technical, economic term, I suppose.
Responses are in the works.
All in all, a busy month for our Mr. Biggs. However, it is encouraging to see the rapid responses to his diatribes. Also, the fact that they are beginning to come from a number of sources other than just the “pension industrial complex” is also encouraging. Finally, to the extent that opponents of DB plans are reaching out for new reasons to support their “conversion” arguments could suggest that perhaps some of their older ones are not gaining much traction? One can only hope.
• Andrew Biggs, American Enterprise Institute: “Public Pension Stimulus Nonsense,” May 3, 2012
- Response by NIRS
- Response by Dean Baker, Center for Economic and Policy Research
- Response by Monique Morrissey, Economic Policy institute
by Professor Robert Costrell, May 2012
Public-Sector Pensions: The Transition Costs Myth,”
May 21, 2012
- Response by Gary Findlay, MOSERS, in PensionDialog.com
May 28, 2012