If I give you $100, and you spend it in Wyoming, how does that help the Vermont economy? Answer: it doesn’t.
Yet that’s just about what Hank Kim from the National Conference on Public Employee Retirement System claimed in testimony to the Pension Benefits, Design, and Funding Task Force last October.
Over the last six-plus months, the Task Force took testimony from numerous sources on the generosity of Vermont’s state employees’ and teachers’ pension systems. Our $5.7 billion unfunded liability isn’t going to go away on its own, but Kim and other activists argue that the massive spending on Vermont’s pensions system is actually a good thing. Even our more progressive committee members expressed skepticism of such a grandiose claim.
The argument goes like this: any reforms that reduce the excessive generosity of pension benefits would have catastrophic effects on the Vermont economy. Vermont’s pensioners pay taxes, so they help our state revenue coffers and our local economy. Reducing the generosity of benefits to new teachers and state employees would thereby lower our revenue and economic activity.
This argument is self-evidently absurd. Much of this benefit rests on the implicit assumption that pensioners pay some of their pension income back to Vermont through taxes, and use another sizeable portion to grease the wheels of Vermont’s economy. These factors are economically insignificant relative to the funds flowing from Vermont's coffers into pensions.
That’s due to the significant “leakage” of funds from Vermont’s pension systems and into other states’ economies. We already know Vermont has a migration problem, with folks fleeing to better economic climates. Just how many pensioners are living out of state?
After a public records request to the State Treasurer's Office, we received our answer. About 25% of the Vermont’s 17,400 retired teachers and state employees that are actively collecting a pension have a primary residence outside Vermont. In other words, for every $1 in pension benefits paid out, back-of-the-envelope arithmetic suggests that only $0.75 remains in-state.
Put another way, Vermont spent more than $350 million in pension benefits in 2020 alone. While activists would like you to believe that whole sum benefited the Vermont economy, nearly $90 million went out-of-state. Yet the entire cost was borne by Vermonters, whether it’s current taxpayers or those down the road who will be facing the consequences of our dangerous decisions today.
Unsurprisingly, the Census Bureau’s state-to-state migration data shows that many former Vermonters wind up in tax friendly states. In 2019, nearly 7,000 Vermonters moved to one of the nine states with no state income taxes, compared to the less than 5,000 Vermonters who moved from one of these states to Vermont.
Put simply, Vermont’s pension checks are getting shipped out-of-state as retirees look for rosier places to retire. Reducing benefits to new teachers and state employees would go a long way toward reducing Vermont’s severely underfunded pensions, increasing Vermont’s credit rating, allowing Vermont to borrow money more cheaply when necessary, and keeping more money in-state.
All this is to say, we can and should have a lively debate about how to address our state’s unfunded liabilities. But the reality is that a substantial portion of pensioners have left our state for better climates, and that it simply cannot be claimed that the pension checks they’re cashing somehow benefit the Vermont economy. As long as we continue to deny that our challenges exist, we’ll be stuck with our heads in the sand. It’s time for some intellectual honesty.