Public pension critics are often accused of indifference towards the issue of retirement security and/or naïveté about defined contribution plans' shortcomings.
First, the question is not whether retirement security is a serious issue, but whether it's a core function of state and local government. Why should the public sector provide special "old age poverty insurance" for its retirees? Unions and many system administrators view retirement benefits not as compensation, but as, essentially, special social welfare programs for retired public workers.
Second, of course not all defined contribution plans are equal. And by all means, let's help to promote better plans.
The Manhattan Institute's Empire Center shows how it's done. The recently-released policy brief "Shrinking the retiree health care iceberg" explains Retiree Medical Trusts (RMT), which are collective defined contribution plans for retiree healthcare. As such, RMTs provide governments with a way to preserve retiree healthcare benefits while also reducing or even eliminating their long-term liability.
Throughout an employees' career, employee and employer would make contributions into a trust fund; representatives from labor would oversee investments and disbursements. "What discount rate should be used to project future benefits?" "How much should employees contribute?" "Should benefits be increased during bull markets, and if so, by how much?" "How to react to bear markets?" In a standard defined benefit system, these are governments and taxpayers' problems. In an RMT, they are all unions' problems.
Retiree medical trusts are still rare among state and local governments, but not unprecedented. They can provide substantial premium support to retirees-the example in the report is of a fund for police officers in California that is projected (if not guaranteed) to provide $700 per month. RMTs enjoy a highly tax-preferential status, as both contributions and withdrawals are tax exempt.
Reformers should write more reports like this, because let's be realistic. Many governments are likely to continue offering defined benefit pensions and retiree healthcare, even though, yes, they are costly, unnecessary, and basically unfair to taxpayers. But to stay in the game, it helps to be constructive.
401k critics emphasize high fees, low participation rates, and unprofessional investment decisions. These can all easily be avoided by collective defined contribution plans.
State and local governments are large employers, often with 1,000+ workers. Employer benefits surveys regularly demonstrate that pensions and retiree healthcare are more common among large employers, in both the private and public sectors. Why not design benefit systems that utilize economies of scale? It's simply a question of sound public administration.
No matter how it's spun, the REAL ISSSUE is "Total Compensation" (cash pay + pensions + benefits) in comparable jobs (or jobs with comparable risks and skill sets if not directly comparable) in the Public vs Private Sectors.
While most studies (including the US Gov't BLS) show very close "cash pay" in the vast majority of occupations, the Taxpayer paid-for share of Public Sector Pensions, when factoring in the:
(a) richer formulas,
(b) inclusion of COLA increases,
(c) much earlier (unreduced-pension) retirement ages,
(d) much more liberal definition of "pensionable compensation", sometimes including overtime, various "allowances", vacation & sick-day payouts
are multiples greater in value at retirement than those of their Private Sector counterparts.
With Taxpayers being called upon to pay for all but the 10-20% of total Public Sector Pension Plan costs actually paid for by the Workers' contributions (INCLUDING all the investment earnings thereon), these promised over-the-top pensions are unnecessary to attract and retain a qualified workforce, and are grossly unfair to the Taxpayers called upon to pay for it.
The same situation exists for retiree healthcare, a VERY expensive benefit, ESPECIALLY when granted to retirees that are not yet eligible for Medicare (quite common considering the very young retirement in the Public Sector). While few in the Private Sector get subsidized retiree healthcare from their employers, substantial subsidies (sometime completely free coverage) are routine in the Public Sector. Why, with Taxpayer paying for this (and no less in cash wages to public Sector workers), is this justifiable or "fair" to the Taxpayers ?
Lastly any DB or DC Plan can be designed to be very rich or very limited ... and therefore very expensive or modest in cost. And while there are some mortality sharing advantages to DB Plans, in the final analysis, DB Plans simply cannot work in the PUBLIC sector mainly because politicians cannot be trusted. The true cost of the benefits can too easily be hidden (to grow and be passed along to future Taxpayers) and the Unions make sport of "gaming" every aspect of such Plans to the detriment of Taxpayers.
Hi Steve, I don't think that pension reform advocates are malevolent creeps, and public sector entitities are not required to provide pension benefits to employees, beyond their contractual obligations. Pensions can be reformed legally, prospectively. However, public sector entities will honor current contractual obligations voluntarily or by court order. Legal, prospective reform permits elected officials to avoid public pension litigation as well as allegations of "creepiness."
COLORADO COURT OF APPEALS CONFIRMS COLORADO PERA PUBLIC PENSION COLA BENEFITS AS CONTRACTUAL.
The Colorado Court of Appeals has reversed and remanded an initial District Court ruling that denied the contractual status of public pension COLAs in Colorado. The Court of Appeals confirmed that Colorado PERA pension COLA benefits are a contractual obligation of the pension plan Colorado PERA and its affiliated public employers. A huge victory for public sector retirees in Colorado! The Colorado Legislature may not breach its contracts and push taxpayer obligations onto the backs of a small group of elderly pensioners.
The lawsuit is continuing. Support pension rights in the U.S. by contributing at saveperacola.com. Friend Save Pera Cola on Facebook!