If there’s one good government idea out there, it’s the concept of moving public workers from anachronistic defined-benefit plans to modern 401(k)-style retirement plans.
Not exactly the sexiest topic in politics today, but for workers and taxpayers, it’s a winner. And it’s not particularly complicated once you tune out the mewling and puking from self-interested public-sector unions and acolyte politicians who enable defined-benefit plans to become a big honey pot from which one may dip at the expense of unborn taxpayers.
Defined-benefit plans stem from a bad moment in time in which employers — and now unions — cared for employees like children incapable of planning for their own retirements. Over time, these plans metastasized into grotesque shadows of their initial good intention.
In a perfect world, defined-benefit plans get the math right in terms of how much a government employee must put in and how much the taxpayer must put in. The rules for retirement are reasonably set and never abused; costs for health care remain predictable; and defined-benefit plan funds are wisely and conservatively invested to keep the plan solvent regardless of the number of employees in the plan.
Virtually every state in the nation has broken those fundamentals, producing what is called an “unfunded liability.” Whatever the shortfall in a state’s defined-benefit plan for the retirement and health care of public workers, the taxpayer — both present and future — must pay.
California is the poster child for this.
On top of an upside-down budget, California also carries an unfunded pension debt of anywhere between $500 billion and $55 billion, depending how you want to calculate it. The overseers of the plan use the lower number because it is based on their anticipated return from diversified investments — some say “risky” diversified investments that will likely not be attained. A Stanford graduate student calculated the debt at the higher number using a risk-free bond rate of return.
And the anecdotes for how the California system has been abused are legion. For example, how many times have we heard about a highly paid state worker “retiring” on Monday only to start a new state job at a desk in the next room, thus double-dipping the system.
Or, consider Scott Plotkin, who pulled down a state salary and bonus of $562,333 in 2009 with the California School Boards Association.
Then he was caught charging thousands of dollars on his company credit card at a local casino. He quickly “retired” and, as Marcos Breton of the Sacramento Bee wryly observed, he “got what he deserved” — a lifetime pension of $17,089 per month. He’s 57. Life expectancy is 78. You do the defined-benefit ugly math.
California’s next-door neighbor, Nevada, doesn’t make the national news as much. But it’s in trouble, too. With only a couple of million residents, the state carries at least $10 billion in unfunded pension and health care benefits. This is on top of the state’s anticipated general fund revenue shortfall, which runs ten figures.
The Teachers’ Retirement System for Illinois announced this month that its unfunded liability now stands at nearly $40 billion. This defined-benefit plan covers 365,000 teachers, administrators and other public school employees. Upside down doesn’t begin to describe the trouble this fund is in.
And so it goes for almost every state in the nation.
Now there’s a growing cry for wholesale reform. Not the kind of reform that works around the edges of the abused existing system, but transformation into a better a way — a 401(k) plan.
In a 401(k), the employee and the employer contribute to a worker’s retirement plan under guidelines set forth by the federal government. That money resides within the account of each worker. The money belongs to the worker, and that worker controls how it is invested.
Upon retirement, instead of getting a monthly check, all of the money in the 401(k) plan belongs to the worker. It can be used in any way the worker wants. It can be passed on to heirs or charity, unlike defined-benefit plans that bank on a certain number of workers dying before they collect all the money they put into the system. (In Illinois, they’ll need about half their teachers to die today to get right-side up.)
The No. 1 attribute of 401(k) plans is they are perfectly in balance from day one because employers and employees pay as they go. There is no future unfunded liability.
That’s a better, more responsible way to provide retirement benefits for public workers.
Unless, of course, we’re happy passing huge debt on to our children and grandchildren.
Sherman Frederick (email@example.com), former publisher of the Review-Journal, writes a weekly column for Stephens Media.