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State leaders and national experts make the case why dropping out of traditional public pension systems is not the silver bullet for state budget woes. From left to right, Dolores Bresette, distressed R.I. pensioner; Hank Kim, National Conference on Public Employee Retirement Systems; N.C. State Treasurer Janet Crowell; New York State Comptroller Thomas Napoli; and Dean Baker, Center for Economic & Policy Research. The panel convened on Jan. 19 at the National Press Club. (The Epoch Times)
WASHINGTON—Governments in states faced with huge shortfalls in public service worker pension funds are enacting or considering fundamental changes to retirement plans, balancing costs against risk.
Defenders of traditional public pension plans say abandoning the traditional pension benefit plans in favor of more volatile stock market-driven 401(k)-type plans would be a big mistake, and threaten retirement security, potentially placing retirees into poverty who do not receive social security.
About 30 percent of public employees don’t receive social security, according to AARP’s NRTA Pension Education Toolkit.
“The market crash of two years ago and the Great Recession, not the pension benefits, are the cause of the pension shortfall,” said Jordan Marks of the National Public Pension Coalition (NPPC), at the National Press Club (NPC) Jan. 19. The NPPC states that prior to the market crash, public pension systems were on average 96 percent funded, citing as its source information from the National Institute on Retirement Security.
The 401(k) is not the silver bullet to get rid of challenges that we are all facing.
—N.C. State Treasurer Janet Crowell.
Dean Baker, co-director of the Center for Economic and Policy Research, said that it was wrong to blame state budget problems on existing public pension systems, which, for the most part, were adequately funded before the financial crisis. “If states go the route of dismantling their pension systems, it will end up costing them more in the long-run, not less,” he said at the NPC discussion.
Utah, Alaska, Colorado, Georgia, Michigan, and Ohio have taken steps to change to, or at least offer, 401(k)-type retirement plans, while Kentucky, Oklahoma, Kansas, Texas, North Dakota, and Virginia are giving it careful examination, according to the NY Times.
According to the National Conference of State Legislatures, 29 state legislatures enacted significant retirement system changes in 2011, and other states revisited the topic. In total, 41 states enacted significant revisions to at least one state retirement plan in 2010 or 2011.
Yet the states with the worse pension problem—Illinois, California, and New Jersey—have not gone that route. In California, when then-Governor Arnold Schwarzenegger in 2005 proposed a 401(k) plan, he was blocked by the public employee unions.
Critical in this discussion is the difference between defined benefit (DB) plans and a defined contribution (DC) program. DB pensions guarantee the pensioner a specified amount during retirement. Retirees receive a regular guaranteed benefit in the form of periodic payment or annuity benefit regardless of stock market volatility or economic slumps.
If the state is short of the amount due to low returns on investments, the state must find a way to pay for it, even taking it from vital programs in the social services.
With DC programs, the pensioner owns a specific value, and that value is set firmly. Most private sector company 401(k) plans are defined contribution programs.
New 401(k)-style pension plans allow states to set the limit on the amount they will contribute, leaving it to employees to make decisions on investments, and figure out how to make enough money for their retirement years. Thus, the pensioner—not the state—assumes the risk.
According to the Times article, Republicans overwhelmingly support the changeover to DC plans like the 401(k) because it fits with their philosophy of individualism and free markets, while Democrats tend to support traditional pension plans, which their union allies prefer.
Utah went over to a 401(k)-type plan after the 2008 stock market crash, when the Utah pension fund lost 22.3 percent of its value, according to Utah state actuaries. Prior to a loss in 2007, Utah’s public state pension was fully funded. By 2008 it was 96.5 percent—not too bad—but the projection was that it would be only 70.5 percent funded by 2013.
“Utah will have to commit about 10 percent of its General Fund for 25 years to pay for the 2008 market crash,” says Dan Liljenquist, a Republican state senator who led the effort for Utah to switch to a 401(k)-type system.
Rhode Island enacted the most dramatic revision of a statewide plan in 2011. In November, legislation terminated the defined benefit plans for nearly all state employees, teachers, and many municipal employees in the state. “The hybrid plan will consist of a reduced defined benefit plan and an individual account for each members [sic],” said the National Conference of State Legislatures.
Rhode Island suspended its Cost-of-Living Adjustment (COLA) provision, calling it “one of the most expensive aspects of the current pension system,” until funding “exceeds an 80 percent funding level,” according to a FAQ on the state treasurer’s website. Such a move distressed pensioner Dolores Bresette, who was a public employee for 37 years and contributed 9 percent of her salary every paycheck.
Continued: DB Pension Plans Defended
