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Do teacher pension plans boost the Illinois economy?

March 12, 2019

The Teachers’ Retirement System of the State of Illinois (TRS) administers a defined benefit pension plan for public school teachers. It’s a massive beast, with about $50 billion in invested assets for more than 400,000 members and benefit recipients.

Fifty billion dollars may sound like a lot of dough, but the TRS plan is woefully underfunded. At the end of fiscal year 2017, the plan reported having just 40 percent of the assets needed to cover a present value liability of $127 billion.

Amidst growing angst in Illinois about government financial conditions, and a rising tide of outmigration, take a peek at the item at the top of the front page of the TRS website today. It links to a recent press release titled “TRS Members Boost Economy By $16.1 Billion Annually.”

Why would an upside-down pension plan be advertising its broader social value in such a prominent way? What if the claims to social benefits are flawed? Should they be the basis of public policy?

Consider in turn that many of the teachers who are TRS members are also teaching kids about economics, finance, and government policy.

For economic impact studies, you have to consider the source. Here, the TRS is reporting on its own study of its own economic impact on the state. Is it possible that those benefits are overstated in the interest of TRS members?

Like a wide variety of other agenda-driven economic impact studies, TRS starts with payments of salaries and benefits to active and retired members. From there, it applies formulas that theoretically calculate economic stimulus, in part using “multipliers” for spending by the firms and people that received money from the teachers and pensioners spending their money.

The TRS states that it uses net, not gross payments, subtracting taxes from gross payments to active and retired teachers “to be more conservative.” But there is a bigger reason to be more conservative, if not more accurate.

Where did the money paid to teachers in salaries and benefits come from?

Consider the argument in an article by Roy Cordato at the John Locke Foundation titled “Economic Impact Studies: The Missing Ingredient is Economics.”  Cordato identifies a key flaw in many of these studies: they don’t account for opportunity cost, one of the most fundamental concepts of economics:

Every dollar that is spent as these “impacts” occur and every resource that is used, including labor, has an unseen opportunity cost. … What economic activities would have occurred if that money remained in the hands of the taxpayer?

The State of Illinois and the City of Chicago are fiscal disasters. The prospects for government services and future tax policy changes are driving significant outmigration. Claims that TRS or other pension plans “boost” the economy deserve close scrutiny -- and skepticism.

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