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Is It Finally Time for Public Pension Reform in California?

Adam Summers
July 31, 2009, 11:48pm

There was an excellent Associated Press article earlier today on the public pension problem in California. Here are some highlights from the article:

» New Mexico this year approved longer work requirements--from 25 years to 30 years--for state employees starting in 2010.

» New Jersey last year raised the minimum age to qualify for benefits from 60 to 62.

» Kentucky now requires new police hires to contribute 1 percent of their pay to help cover retiree health benefits.

» And Georgia has started a hybrid plan for new state hires that blends a defined-benefit pension--with set payments based on salaries--and a 401(k).

According to the article, Schwarzenegger is now reviving the idea of pension reform, which he abandoned during the last round of budget negotiations. The plan, which would apply to new hires, would scale back pension benefits to pre-1999 levels--before a bill increased government employees' pension benefits by as much as 50%--and would require government employees to work five additional years before earning full pension benefits. The administration estimates that the proposal would save $95 billion over 30 years.

While the Schwarzenegger proposal would be an improvement over the current, overly-generous pension system, it would still be just nibbling at the edges when the system needs truly comprehensive reform. It does not address the increasing costs of retiree health-care benefits at all. Moreover, the entire defined-benefit structure of the pension system is unpredictable and unsustainable, as private-sector companies discovered long ago. (Just look at what has happened to private firms like those in the steel, airline, and auto industries that tried to maintain defined-benefit systems). The state should thus follow the private sector's lead and switch to a 401(k)-style defined-contribution system, whereby the state would contribute a flat percentage of a government employee's salary to that employee's retirement fund, and adopt salary and benefit rates that are comparable to those earned in the private sector. Those who do not work for the government should not be forced to pay for ever-richer benefits for public employees while they are seeing their own retirement funds dwindle during difficult economic times.

Adam Summers is Senior Policy Analyst

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