Is It Finally Time for Public Pension Reform in California?

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

  • California has at least $63 billion in unfunded pension liabilities
  • Gov. Arnold Schwarzenegger’s administration has estimated that these liabilities could grow to $300 billion if state pension funds continue to perform below anticipated returns.
  • State and local governments across the nation are facing hundreds of billions of dollars worth of unfunded public employee pension and retiree health-care costs.
  • Government retirees in California enjoy health-care coverage for themselves and their families that can cost the state $1,100 a month per retiree, according to the California Public Employees’ Retirement System (CalPERS).
  • “The Center for Retirement Research at Boston College found that while 43 percent of private employers offered some type of retirement plan in 2006, they tended not to be as generous as public employee packages. Private-sector workers also rarely receive retiree health care coverage, meaning most have to work until they can start drawing Social Security and Medicare at age 65. Workers born after 1960 will not be eligible to retire until 67.”
  • “Government workers and their union representatives often say the more generous pensions offset lower pay. But the latest U.S. Census survey, from 2007, shows the average annual salary of California state government employees was $53,958, compared with $40,991 for the average private-sector worker.”
  • Other state governments are reducing benefits for new government employees to address their pension funding problems:

” 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.