Pension Reform – Time for a Reality Check

[This article was first published by Maureen Bader on October 13, 2014]

Introduction

Imagine living in a place where anyone can have anything they want by just wishing for it. If one wants a house, one imagines a house—and poof—it appears. But scarcity is the basis for an economic system, thus in a place with no scarcity, people have no needs. In a place where people have what looks like every material need by just wishing for it, they have no need to work, no need to cooperate with other people, and as a result, being naturally quarrelsome, people tend to live farther and farther apart.

Imagine a person living in this place deciding to do something about this situation. He decides he will go back to Earth where he can get real materials and bring them back to build real houses. That would create a community, bring people together and that would mean safety in numbers. 

Someone foreign to this place asks, “Safety from what?”

The man doesn’t answer.

Undeterred, the new person asks, "But if people can get a house by just imagining it, why would they want a real house?"

The logical fellow tilts his head and says, "To keep the rain out, for instance."

"These imaginary ones don’t?"

"Well of course not, how could they?"

“Then why build them?”

“For safety, or at least, the illusion of safety.”

Then a new person asks, "Just where are we?"

"We don’t have a name for it here," the would-be builder says, "but back on Earth, some people call it Hell."

So living in a place where you can have whatever you want, except it is not real, it is just an illusion. Worse still, a place where safety is just an illusion is not such a great place to be.

Pension Promises

Often, government promises create nothing but the illusion of safety. Pension promises are a good example. Government has promised to support government workers in their retirement, but because of the fundamental flaws in the government pension system, this promise is an illusion.

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. The same thing happened in Pritchard, Alabama even though state law required it to pay pension benefits in full.

Although in both cases, pensioners eventually started receiving at least part of their pension payments again, a retired fire marshal in Pritchard died while waiting for that pension check. Imagine being 89 years old, standing by your mailbox, waiting for a pension check that never arrives. That is not a very nice place to be.

When pension funds run out of money, there is no tree from which to pluck pension checks. And if you think this couldn’t happen in Wyoming, think again.

Wyoming provides the same type of pension promise to government workers that Central Falls and Pritchard do, and it suffers from the same fundamental flaws. In fact, Wyoming has a pension plan that will run out of money in about 15 years—Fireman Pension A. This is a closed plan with 292 members, and three current employees in who can retire at 75 percent of their final salary and receive a 3-percent compounded cost of living increase every year. Making this situation worse is that neither current employees nor the taxpayer contribute to the plan, and it is $68 million in the hole.

Speaking of the illusion of security, reform attempts are met with resistance by the very people who would be affected most direly should the system collapse. In the case of Fireman Pension A,  its representative objected to a joint Wyoming Liberty Group and Reason Foundation seminar which sought to solve Wyoming's looming pension debt problem.  Closing one’s eyes and ears to reality won’t change it.  

So how does Wyoming ensure pensioners are not left waiting at the mailbox and future taxpayers are not left with a massive pension debt? The first step is to get real.

Real Pension Reform

When we talk about pension reform, what are we talking about?

Let’s start with an overview of the principles of real pension reform.

First, we must understand that both government workers and taxpayers deserve a retirement system that places people on the path to retirement security and is fiscally sound, transparent and accountable. Legislators must establish a government sector retirement system that is affordable, sustainable and secure. With almost $2 billion in pension debt that won’t just go away, legislators must create a program that pays down this debt as quickly as possible. All this is good, but processes must also be established that ensure future legislators adequately fund retirement promises.

On Monday, former Utah state senator Dan Liljenquist described his experience reforming the pension system in his state. The Utah story is a good example for Wyoming because the state was not in crisis mode before the 2008 downturn. In fact, Utah’s pension system was 100 percent funded. After the market crash, it lost 22.3 percent of its value and leaders realized that without fundamental reform, more and more of the state’s general fund would go to pay down the pension debt, the debt would take years to grow out of, if ever, and should another downturn hit, they would be in an even worse position.

It was time for fundamental reform.

This meant putting new employees into a different type of plan, one that lowered contribution costs and protected taxpayers from market downturns. Utah closed the existing defined benefit program to new employees, taxpayer contributions to the new retirement program were capped by statute at 10 percent of base salary, and new employees had a choice between a straight 401(k) plan or a hybrid plan.

While new employees and taxpayers would still be on the hook to pay down the pension debt created under the old system, the cost of the retirement system for new employees was less than half that of the old, meaning that as the current program came to its end (as retired employees died), resources would be freed up for other programs.

The key for Utah was to gradually reduce pension-related bankruptcy risk until that risk is eliminated.

This is the direction Wyoming must take so pensioners have a pension once they retire and taxpayers are not left with a legacy of debt and higher taxes.