Innovators in Action (July 2014 edition): Advancing Pension Reform in Oklahoma

The latest interview in Reason Foundation’s Innovators in Action 2014 series focuses on recent legislation in Oklahoma that will phase out the state’s defined benefit pension system for general employees by requiring all new state workers (except hazardous duty employees) to enroll in a 401(k)-style defined contribution retirement plan starting next fall. As the chair of the Oklahoma House Pension Oversight Committee and author of this legislation, State Representative Randy McDaniel has been the primary architect and champion of Oklahoma’s pension reform efforts.

Earlier this month, I interviewed McDaniel on what prompted him to take on the issue of pension reform in Oklahoma, how he made the case to policymakers and stakeholders, the specifics of the reforms enacted, pension reform challenges and more. Here’s an excerpt:

Gilroy: Moving to the 2014 reforms, HB 2360 created a defined contribution system for most new state employees starting next year. Can you explain the rationale behind the legislation?

McDaniel: The key attributes are more freedom for employees and less long-term debt for the state. When we break down some of the related issues, I wanted to have a retirement system that was very attractive, but also sustainable. A comprehensive analysis of not only state retirement plans, but also private sector plans, was conducted. The plan has a matching schedule that is competitive with the biggest and best companies in the country.

Since the costs are certain and affordable, this will allow us to continue funding the current defined benefit plan to ensure its financial viability until its debts are paid off.

Gilroy: How will HB 2630 benefit taxpayers and reduce the state’s financial risk? What were the most effective arguments in favor of reform?

McDaniel: When you have a defined contribution plan, there are no new unfunded liabilities created from that point forward. The argument becomes what happens to the existing plan, and we were able to overcome that concern with data illustrating the financial commitment to the existing defined benefit plan, as well as the new retirement system.

An issue that is overlooked in the mathematical data is the issue of political incentives to harm the system by making unsustainable financial promises. Unfortunately, those incentives are real, and they greatly impact the situation we face today. It’s easy to make promises when someone else is going to have to pay for those promises at some point in the future.

So the two great benefits to the taxpayers are: (1) we know what the costs of the new system are going to be and we can plan for it; and (2) it greatly reduces the political situation that has led to the condition we’re in today.

Check out the full interview here. Other articles featured in the Innovators in Action 2014 series are available here.