More Money for Pensions Means Less Money for Roads

            The Wyoming Taxpayer is Tapped Out

(First published by Maureen Bader on December 17, 2012)

Wyoming’s state pension plan does not have enough money in it to pay bureaucrats their promised pensions. To fix that, legislators may increase contributions to the plan. The question is where will the money come from? State employees, taxpayers or both? Government is looking for ways to strengthen the plan but like so much of government policy these days, it is avoiding a long-term solution, leaving both taxpayers and pensioners at risk.

Pension plans come in two basic types: defined benefit and defined contribution. Defined benefit plans promise a defined payment when a person retires. This type of plan was developed at a time when relatively few retirees took money out of and many workers paid in to the plan. Wyoming state employees have defined benefit pension plans. Defined contribution plans, on the other hand, make a payment to retirees that depends on how much is contributed into the plan and how well the money is invested.

Today, most of the private sector has switched over to defined contribution plans to ensure they are able meet their pension obligation to retirees. According to the Bureau of Labor Statistics, in the Mountain geographical area to which Wyoming belongs, about 84 per cent of government workers have access to defined benefit plans, while only about 20 per cent of private sector workers do. In fact, only 48 per cent of private sector employees have a company pension plan at all. If a company in the private sector has a plan, it is most likely a defined contribution plan.

Pensioners who still have defined benefit pension plans face huge financial risks. For example, one day the City of Central Falls in Rhode Island simply stopped sending pension checks to pensioners because its pension fund ran out of money.

In fact, Wyoming’s state employee pension plan is only about 82 percent funded. That means, should the plan close down today, the government would only have enough money to pay 82 percent of what it promised retirees.

Wyoming’s legislature made a few pension reforms in 2012 that will save Wyoming taxpayers $1.2 billion over 30 years and reduce the anticipated unfunded liability by $2.9 billion. Now, still with an unfunded liability of $1.275 billion, it is looking to increase the amount contributed to the plan each year. Currently, the taxpayer contributes 7.12 percent, or $128.5 million per year to the employee plan, while employees contribute 7 percent, or about $126 million. If contributions increase beyond this by between 2 percent and 4 percent, the plan could be fully funded in 30 years. This means, however, that the taxpayer could be on the hook for an additional $74 million per year to fund the pensions of government employees -- employees whose compensation packages are already more generous than many in the private sector.

Wyoming legislators are developing a bill to increase contributions. At the moment, the plan is for state employees to pick up the tab for the increase. However, government workers are a savvy group with easy access to legislators, so expect amendments to any bills presented to the legislature in January that have employees picking up the bill.

If government forces taxpayers to put at additional $74 million per year into state employees’ pension accounts, that means it has $74 million less for priorities such as road maintenance -- or to leave in the pockets of taxpayers to fund their own pension plans. Everyone must save for his or her retirement, but the government’s solution is based on a reality that no longer exists. To provide security to current and future government retirees, and to ensure that taxpayers are also able to save for their retirements, the state must move to a defined contribution plan in parity with private sector pension benefits.