New Notes & Notions by RC 43 VP Felicia Bruce: Pension Trends
Pension Trends
Public and private pensions are under constant scrutiny. What most fail to realize is the connection between the two or how one 'drives' the other. Traditionally the public sector 1) paid lower salaries 2) BUT had better benefits AND 3) offered more job security. Among those better benefits were a defined benefit pension plan. The private sector by contrast offered salaries 10-20% higher, might offer signing bonuses and gauged its benefits package proportionately to what was happening in the public sector. Unions played a significant role in this scenario because they negotiated better wages and benefits for their members to which the private sector had to respond.
As unions declined in membership and power, wages and benefits suffered thus depressing the growth of the middle class. After decades of attacks on unions coordinated by groups like ALEC and other conservative think tanks that provide 'model legislation' for state officials to enact, both public and private employers call for abandoning defined benefit plans altogether, closing pension options to new hires or offering choices that benefit them far more than they help workers. Many lawmakers call for a transition to 401K-like plans. So called 'hybrid' plans promise to maintain pensions for existing employees but puts new hires into a DEFINED CONTRIBUTION system which contrasts with the defined benefit plan. 401K retirement accounts are the defined contribution type where the recipient's return fluctuates according to the whims of the market. In depressed economies that 401K might look more like a 201K .
State legislatures that have made bad financial decisions over the years have amassed pension debt that is staggering because their bad decisions have combined with investment underperformance and fewer workers supporting more retirees to create a tsunami of woes for aging workers.
Although New York and Florida both have pension systems that are not subject to this tsunami, legislators in both states constantly raise the specter of transitioning to a hybrid system. While other states are in far greater dangers, the imminent collapse of pension systems is not a clear and present danger any where! So why do these lawmakers in every state repeatedly call for restructuring the retirement systems everywhere? Basically for two important reasons: 1) institutional investments like public workers' retirements are extremely lucrative for financial firms. Clearly there are profits to be made by managing employees regular contributions 2) private industry wants to lower its offerings to workers which is patterned after the benefits public workers receive
In the end what the proponents of these changes fail to reveal is that putting new hires into 401K systems won't cut what is owed to those already in the system! In other words, it will do nothing to reduce the unfunded liability states with pension funding problems are experiencing now! Switching from defined benefit to defined contribution in other words will benefit no one now: not the state, not the retirees and not the current or future workers.
Despite that, several states have already transitioned new employees to a defined contribution system. In Alaska, when the state mandated a 401 K like plan for all new hires, the pension debt was $5.7 B....several years later (2013) it had grown to $12.4B. West Virginia, had a similar experience . It had changed in 1991 but switched back in 2005! Many public workers' pensions are guaranteed by state laws. Where state law does guarantee pensions, when a state attempts to cut current workers' benefits, lawsuits follow in which the state loses as was the case in South Carolina. In 2006 SC had to refund more than $30M to thousands of retirees.