Economics

Retiring Public-Sector Retirement Plans

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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.