Hoover Institution
12/10/2024 | Press release | Distributed by Public on 12/10/2024 06:38
State Pension Contributions And Their Impact On State Education Budgets
From 2015 to 2022, state education budgets increased allocations toward pension contributions. Studying six states, using Governmental Accounting Standards Board reports along with data from the National Center for Education Statistics, we observe that average pension contributions increased by more than 40 percent. States exhibited significant heterogeneity in these changes, with Massachusetts's budget allocation increasing by almost 5 percentage points while Minnesota's increased by only 0.4 percentage points.
Key Takeaways
- Analyzing the education budgets of Massachusetts, California, Georgia, Florida, Texas, and Minnesota from 2015 to 2022, we find that states have increased their allocations toward pension contributions by over 40 percent (as a share of total education expenditures).
- State-by-state allocation changes varied significantly, with Massachusetts allocating an additional 5 percentage points of its education budget toward pension contributions while Minnesota increased its allocation by just 0.4 percentage points.
- While pension contributions are taking up a greater share of education budgets across most of the states analyzed, the funding ratio of each state's pension fund remained largely unchanged over the period studied. This suggests that despite increased allocations, the solvency of the pension funds has not improved.
- To address these systemic issues, policymakers should consider moving away from defined-benefit pension plans toward defined-contribution pension plans to simplify state budgeting and to allow employees to take their retirement benefits with them when leaving for another job.
- Furthermore, states should reduce their investment expectations when assessing their respective pension fund's liabilities to avoid masking the extent to which funds are underfunded.
State Pension Contributions and Their Impact on State Education Budgets by Hoover Institution
About The Authors
Joshua D. Rauh is a senior fellow at the Hoover Institution and the Ormond Family Professor of Finance at Stanford's Graduate School of Business. He was formerly principal chief economist on the President's Council of Economic Advisers and taught at the University of Chicago's Booth School of Business (2004-9) and the Kellogg School of Management (2009-12).
Gregory Kearney is a senior research analyst with the State and Local Governance Initiative at the Hoover Institution. He previously worked as a research economist at the President's Council of Economic Advisers at the White House and, before entering public policy research, in transfer pricing consulting in New York City.