Retiring Public-Sector Retirement Plans

Nick Gillespie | April 6, 2009

Defined-benefit retirement plans for public-sector workers create vast liabilities for taxpayers and governmental units. Some places are going the other way by creating defined-contribution plans (more common in the private sector) or going one step farther still. From an AP story:

For decisive action, few can top Grand Forks, N.D. In 1995, the Grand Forks City Council, disturbed by the city's pension burden, took a page from the private sector and eliminated pensions for new employees.

Proponents have long contended that defined-benefit pensions are a major selling point for public service, warning that diminished—or nonexistent—retirement packages would discourage many potential employees. Fourteen years after Grand Forks ended its pension, however, the offices at City Hall still are filled.

How do defined-benefit plans leave us on the hook?

Until recently, the trend in public pensions was ever-sweeter benefits for city, county and state employees—monthly checks equal to all or most of their former salary, eligibility in middle age and lifetime health coverage at relatively modest cost. Elected officials routinely approved the enhancements, their benevolence often magnified by bullish stock market returns.

Tightening budgets and last year's disastrous market, however, have accelerated a reversal that already had begun when the Pew Center on the States found in 2007 that states alone faced $731 billion in bills for unfunded pensions, retiree health care and other benefits. When 2008's setbacks and local governments' obligations are added to the equation, the price tag now tops a staggering $1 trillion.

Boy, a trillion dollars just doesn't seem so big anymore, does it?

Whole story here.

Since the late 1970s, when 401(k) and 403(b) programs became possible due to a rewriting of the tax code and innovation by accountants, they are increasingly popular because they relieve employers (whether public or private) of future debt (see GM for an example of "legacy" costs that make the company less able to transform itself). And, more important, they give employees more flexibility in saving for retirement and taking their money with them from job to job. Here's hoping that the current recession doesn't motivate pols and voters to demand a return to defined-benefit pensions that end up serving today's and tomorrow's work force far less efficiently.

Comments

Taktix®|4.6.09 @ 8:33AM|#

Great, 8 a.m. on Monday, and you guys post two articles throwing a bunch of numbers at us.

Gee, thanks...

robc|4.6.09 @ 9:47AM|#

Numbers good. People bad.

Josh|4.6.09 @ 9:58AM|#

Marijuana will be legalized nationwide before you see defined-contribution plans be the norm in the public sector.

Alan Vanneman|4.6.09 @ 11:11AM|#

"And, more important, they give employees more flexibility in saving for retirement and taking their money with them from job to job."

The problem is, human nature being what it is, a lot of people just cash in the 401k and party. "Many workers, especially those who had 401(k) balances of less than $5,000, took taxable cash distributions. In fact, more than 40% of distributions from 401(k) plans were taken in cash, according to the Federal Reserve Board's 2004 Survey of Consumer Finances."

http://articles.moneycentral.msn.com/RetirementandWills/InvestForRetirement/LeavingAJobWhatAboutThat401k.aspx?page=all

Some legislation in 2005 took a shot at "libertarian paternalism," but, as the WSJ article linked by Matt suggests, a lot of people hope to die before they get old. Sounds like a plan!

|4.6.09 @ 11:20AM|#

Let's not forget that public pension funds are often managed by politicians who can't resist the temptation to use the massive pension assets in "socially responsible" ways. This results in diminished returns with the taxpayers paying for the deficiency.

|4.6.09 @ 11:25AM|#

The problem is, human nature being what it is, a lot of people just cash in the 401k and party.

As is their right. Their inability to save, however, does not give them the right to tax me to support them when they get old.

|4.6.09 @ 12:32PM|#

As is their right. Their inability to save, however, does not give them the right to tax me to support them when they get old.

Agreed. However, what do you do with the losers once they've outlived whatever savings they have and they've gotten too old to work? Let them starve? It would be justified, but human nature is to be compassionate and not let that happen.

robc|4.6.09 @ 12:45PM|#

It would be justified, but human nature is to be compassionate and not let that happen.

That is fine, no need to get the government involved. Feed them? Let them starve? The choice is yours. Two good choices, why should the government eliminate one?

Craig|4.6.09 @ 1:58PM|#

This is going to be one of the biggest political issues of the next decade, as governments start to go broke, taxes go up, and private sector workers who've already liquidated their meager 401(k) and IRA accounts for living expenses start realizing how much retired government workers are soaking them for.

|4.6.09 @ 3:00PM|#

I really don't understand why a defined benefit program is more expensive than a non-defined program. Aruguably it could and should be cheaper.

For example, I Pay into both my State Teachers Retirement Fund, as well as a 403b account. The State fund because of the billions to invest and the relatively small number of people required to make the investment decisions has a total cost in terms of fees and expenses that are incredibly low. Well under 1/2% annually.

Compare that to my 403b plan which has exorbitant fees running nearly 2%. I am convinced that the REAL reason many "conservatives" want to move to a 401K or 403B type system is not to save the government any money but to increase the fees paid to walstreet firms.

Further, consider this, the real reason that defined benefits plans have come under attack is the fact that politicians don't have the balls to say no to the employee unions. If the government would simply say, "Sorry we can't afford a full retirement for a cop after just 20 years of service." That would force members to pony up a bigger chunk of their current pay for earlier retirement.

I would also go so far as to argue that a defined benefit plan could be cheaper than 401K style plan. The real reason it is cheaper is that a majority of employees don't max out their contributions. Which means at the end of the day, when our elderly go from being the richest segment back to being the poorest and they vote themselves a big chunk of federal dollars which we will end up paying. It will be the fault of those who destroyed the defined benefit plans.

Regards

Joe Dokes

|10.28.09 @ 12:59PM|#

According to 8/09 press release, public sector retirees under California PERS (state, cities, counties,non-teaching school employees) receive pensions averaging less than $24,000 annually with about 75% receiving less than $36,000. That doesn't sound outrageous to me. I'm retired but don't have a public sector pension.