Pension Reform Newsletter – February 2015

This newsletter highlights articles, research, opinion, and other information related to public pension problems and reform efforts across the nation. To find previous editions, please visit https://reason.org/newsletters/pension-newsletter/.

Articles, Research & Spotlights

• Poll: Americans Are Concerned About Public Pension Costs
• What Causes Policymakers to Underfund Pensions?
• How San Jose Took on the Unions and Saved Millions through Pension Reform
• Sign of Reform for Military Pension
• Government Debt on the Road to Ruin
• Three Reasons to Fix Public Sector Pensions Now
• A Tale of Two Pensions

Quotable Quotes on Pension Reform

Access to the Pension Reform Handbook

Contact the Pension Reform Help Desk

 

Articles, Research & Spotlights

Poll: Americans Are Concerned About Public Pension Costs
By Emily Ekins, Reason Foundation

The new Reason-Rupe national telephone poll of 1,003 adults finds 72 percent of Americans are concerned their state and local governments may not be able to afford the pensions that have been promised to government workers. With those worries in mind, 82 percent favor requiring current public employees to contribute more towards their own future pensions and benefits.

Sixty-seven percent of Americans favor shifting future public employees, those who haven’t been hired yet, from guaranteed defined-benefit pensions to 401(k)-style retirement accounts and 59 percent of Americans favor shifting current public employees to a 401(k)-style retirement system. However, only 38 percent of Americans support transitioning current public employees from guaranteed pensions to 401(k)-style retirement accounts if it means breaking a contract with existing workers.

When confronted with the hard choice of pension reforms or higher taxes, 81 percent of Americans say public employee contracts should be renegotiated to reduce pension benefits and current employees should contribute more to their own pensions. Likewise, when presented with the choice between cutting government services and pension reform, eight in 10 Americans choose the latter. In short, Americans are concerned about breaking promises to public workers but overwhelmingly support reforming pension benefits over raising taxes or reducing services.

To read the full analysis and access the poll results, go here.

What Causes Policymakers to Underfund Pensions?
By Anthony Randazzo, Reason Foundation

The failure of many states to properly fund their pension systems has been a well documented reality over the past few years, and unfunded liabilities are estimated to be as high as $4 trillion. However, a little examined question, though, is why policymakers have been so particularly bad at this area of their many responsibilities.

In a recently published paper on State and Local Government Review, USC political scientist Michael Thom and Reason pension expert Anthony Randazzo investigate what caused some states to fund their pensions in full and what caused others to underfund their pension plans, based on comprehensive data on 50 states over the past decade. It turns out there are various fiscal, political, and institutional factors at work, and no one-size-fits-all answer.

To read more about the paper, go here.

How San Jose Took on the Unions and Saved Millions through Pension Reform
By Alexis Garcia via Reason.com

“If a government can’t provide the core basic services, it’s failed in its mission,” says Pete Constant, a former member of the San Jose City Council who advocated for sweeping pension reform. “Our city had been in many years of budget deficits and there were many more coming in the future. And I just thought the financial decisions had been terribly made.”

Constant became involved in city politics after an injury ended his 14-year career with the San Jose Police Department. Once in office, he found that San Jose’s pension liabilities were rapidly devouring the city budget. The financial situation in San Jose became so dire that officials had to slash city employee salaries and shut down brand new public facilities. But these cuts weren’t enough to get San Jose’s massive debt problem under control, so members of the city council began looking at pension reform measures to contain rising costs.

To see the video featuring Pete Constant, go here. To learn more about how San Jose implemented pension reform, read our case study here.

Sign of Reform for Military Pension
By Truong Bui, Reason Foundation

While most of the private sector has embraced the defined contribution (DC) pension model, the public sector is still largely using unwieldy defined benefit (DB) plans. This is also true for members in the United States military, whose retirement system faces massive financial challenges and is an obstacle in human resource retention. However, if a recent report by the Military Compensation and Retirement Modernization Commission is any indication, the pension system may see positive changes in the near future which make it an affordable, adequate and sustainable option for both the military and the taxpayer.

As a typical public DB plan, the Military Retirement System has problems not only in terms of costs, but also in terms of benefit distribution. The system was only 31 percent funded in 2012, with the funded ratio having never exceeded 35 percent in the last two decades. The latest data revealed an unfunded liability of almost $1 trillion. Despite the enormous benefit promises, the commission’s report finds “83 percent of all enlisted personnel and 51 percent of officers receive no retirement savings for their service.”

To tackle these problems, the commission recommends a hybrid system that consists of a trimmed-down DB plan, using a Thrift Saving Plan (TSP) model that has been successful in other federal government jobs. The commission’s report finds that the proposed reform should not only improve retirement benefits for military members – especially the younger, more mobile members – but also generate long-term savings.

To read more about the issue, go here.

Government Debt on the Road to Ruin
By Steve Chapman via Reason.com

State and local governments can’t get away with endless budget deficits because of restrictions on their authority to borrow money. But if you think that keeps them from piling up obligations on future taxpayers, you underestimate their ingenuity. Illinois has a bigger unfunded obligation than any state in the country, exceeding $100 billion and, by some estimates, as high as $250 billion. It has attained that distinction by failures like skipping contributions and assuming the economic good times would never end. California has a similar problem. Despite the enactment of a modest pension reform bill in 2012, the state controller reported last year that state and local public pension systems now have unfunded liabilities totaling $198 billion – up 30-fold since 2003.

If you live in neither of these states, don’t assume you are immune. In a paper published last year in the American Economic Journal: Economic Policy , Rauh and University of Rochester economist Robert Novy-Marx concluded that “with the possible exception of Indiana, there is no state for which the current total contributions by all state and local government entities are greater than the present value of newly accrued benefits.” Nearly every state has followed the same basic policy of making promises today and letting someone figure out how to pay for them years from now.

To read the full article, go here.

Three Reasons to Fix Public Sector Pensions Now
By Nick Gillespie & Todd Krainin via Reason.com

Just about every state and local government is in a financial bind because they’re spending more than they take in. Public sector pensions are a major factor here. They already represent a big part of spending and they’re underfunded by somewhere between one and five trillion dollars.

As those shortfalls come due, either taxpayers are going to get screwed through higher taxes and reduced services, or public sector employees are going to take a hell of a haircut. In this short video clip, Reason’s editor in chief Nick Gillespie explains three reasons to reform public sector pensions now:

– Unsustainable pension payouts

– System gaming by public workers

– Unrealistic investment expectations

To watch the clip, go here . To also better understand the challenges of investing in cities where pensions problems persist, check out two stories from Reason Magazine’s March 2015 issue by Steven Greenhut here and here.

A Tale of Two Pensions
By Jason Keisling, Anthony Randazzo & Truong Bui, via Reason.com

Mr. Private just moved to California to teach at a private middle school. He discovers that his neighbor, Mr. Public, will be starting his first year teaching at the local public middle school. As both are 26 and have recently completed a master’s degree, they are projected to have the same annual growth in salaries – around 3.75 percent, minus inflation. Their retirement plans are different, though. Mr. Public is enrolled in a pension plan that promises him a fixed annual salary when he retires. Mr. Private is enrolled in a 401(k), with contributions from himself and his employer, plus he’ll have Social Security when he retires. There isn’t that much difference between the two when they start out, but by the time they each retire at 65 they will have very different retirement accounts.

To see how different their retirement benefits are, see this infographic.

 

Quotable Quotes on Pension Reform

“Current contribution levels are high relative to historical levels and, for almost all employers, scheduled to increase further as our amortization policies phase in previous asset losses. For many plans, the contribution rates have never been as high as they are now. Employers are reporting that these contribution levels are putting significant strain on their budgets and limiting their ability to provide services to the people in their jurisdictions.”
– CalPERS in Annual Review of Funding Levels and Risks

“These are the types of retirement plans the vast majority of our constituents have in their own lives. These are plans that businesses across our country use in their budgets to avoid financial obligations that cannot be planned. We are simply asking public employees to follow the same plans used by those in the private sector as a way to stop the growing havoc public pension systems have created for taxpayers all across the country.”
– Warren Kampf, Pennsylvania State Representative

“CalPERS has bullied its way about in this case with an iron fist insisting that it and the municipal pensions it services are inviolable. The bully may have an iron fist, but it also turns out to have a glass jaw.”
– Judge Christopher Klein

“The benefit cuts in Detroit are being made in the context of municipal bankruptcy, a very different legal and fiscal environment than that of most cities or towns making pension reforms.”
– Jean-Pierre Aubry, assistant director of state & local research, Center for Retirement Research at Boston College

 

Access to the Pension Reform Handbook

For those interested in the process and mechanics of pension reform, Lance Christensen and Adrian Moore published a comprehensive starter guide for state and local reformers. This handbook aims to capture the experience of policymakers in those jurisdictions that have paved the way for substantive reform, and bring together the best practices that have emerged from their reform efforts, as well as the important lessons learned.

To access the handbook, go here.

 

Contact the Pension Reform Help Desk

Reason Foundation set up a Pension Reform Help Desk to provide information on Reason’s work on pension reform and resources for those wishing to pursue pension reform in their states, counties, and cities. Feel free to contact the Reason Pension Reform Help Desk by e-mail at pensionhelpdesk@reason.org.

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Follow the discussion on pensions and other governmental reforms at Reason Foundation’s website or on Twitter @ReasonReform. As we continually strive to improve the publication, please feel free to send your questions, comments and suggestions to lance.christensen@reason.org.

Lance Christensen
Director, Reason Pension Reform Project
Editor