Wednesday, January 18, 2012

Thinking About Pension Reform

I fully support the pension reform initiative that will be on the ballot this June here in San Diego, but I think there are some clarifications needed about the facts surrounding the measure. Some key facts.
  1. Short term savings do not result from a shift to a 401(k) plan. The initiative will save the taxpayers money in both the short and long term. However, closing the defined benefits plan will require a plus up of those accounts as there will be no new entrants into those plans. This is made up for by other means, the most significant being fairer sharing of costs for current employees, a cap on the "pensionable" portion of employee pay and an anti-spiking provision. Further, the plan is not technically a 401(k), but a 401(a) which has less flexibility. A 401(k) is not currently legal for municipal employees by federal law. Call your Congressperson.
  2. The plan does nothing about current retiree health care costs. These costs seem likely to increase as retirees live longer.
  3. The costs of running a 401 style plan are likely to be greater than a defined benefits plan due to the need to manage individual accounts.
  4. The city's contribution rate of 9.2% seems high, but must account for the fact that employees are not part of the social security system a 6.2% contribution. That's a huge benefit to the employees which is often overlooked. Over very long time horizons, employees can expect a return of at least 8% per year as opposed to the paltry 2.6% for a medium income two income couple born in 1985. (Source is social security admin.)

So, am I against the 401(a)? No, I believe that it is better to offload future risk from the taxpaying public to the employee. City employees enjoy very high levels of job security, so the tradeoff should be that the taxpayer is no longer on the hook for supporting them after they retire. I honestly don't know why employees wouldn't prefer this deal.

For a full discussion of public employee pensions in general, and a debunking of many myths, see Governing magazine's article on Pension Puffery by Girard Miller.

1 comment:

  1. And unionized employees should be supportive of the 401 plan too. If your retirement plan is portable, you can change where you work...a boon to cops & firemen who get 'stuck' in a city after about 7 years because it's cost prohibitive to move. This will force cities to have to fight for good employees just like the free market.

    Is the new plan a fix-all, no. But definitely going in the right direction.