Few
people understand how the state pension system works but objections to reform
are legion. Even though the type of pension benefit state employees receive has
virtually disappeared in the private sector, many politicians, bureaucrats and
state pension managers seem to think the government sector is different, making
reform unnecessary. However, government sector pension plans suffer from the
same fundamental flaws as those now mostly purged from the private sector. For
that reason, we must overcome these objections and start serious reform in the
government sector.
Pension
plans come in two basic types: defined benefit (DB) and defined contribution
(DC). DB plans promise a defined payment when a person retires, whether the
pension fund has the money to do so or not. DC plans pay a benefit depending on
how much is contributed into the plan and how well the money is invested. In a
DB plan, pension risk falls to the employer. In a DC plan, pension risk falls
to the employee.
In
the private sector, if a company has a pension plan at all, it is most likely a
DC plan. 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 DB 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 private sector company has a plan, it is most
likely a DC plan. That is because the liability created by DB plans is
something private sector companies cannot afford.
For
example, General Motors gave mostly unionized workers DB plans. In 2009,
General Motors' pension debt equaled approximately $17 billion dollars. When
the U.S. government bailed out General Motors, it saved the pensions of more
than 120,000 retired salaried employees and 400,000 retired hourly workers with
tax dollars. If the government hadn't bailed out General Motors, its pensioners
would have been left without a pension.
Even
though the likelihood of insolvency creates financial risks for taxpayers and
both current and future pensioners, Wyoming legislators have so far backed away
from serious reform.
Why
might that be?
One
of the main arguments against reform is that Wyoming’s pension system isn’t
that bad.
According
to the Wyoming Retirement System’s (WRS) July 2014 report to Wyoming’s Joint
Appropriations Committee, the Public Employee Plan (the largest of eight DB
plans managed by WRS), as of January 1, 2014 was 77.62 percent funded, up from
72.80 percent in February 2013.
But
even 100 percent funded is sometimes not good enough. According to former Utah
State Senator Dan Liljenquist:
We
had the best-funded pension system in the country going into the 2008 downturn,
but during the downturn we lost about 22 percent of the value of our pension
fund almost overnight. […] [E]ven though we were well-funded, that the 22
percent loss in value actually opened up a 30 percent gap in our pension
funding ratio—our funding ratio dropped from about 100 percent in 2007 to a
projected 70 percent by 2013—even though we had paid every penny that the
actuary had asked us to over the previous several decades. […] [W]e realized
that if this system was dependent on stock market returns with the legislature
and taxpayers required to come back and cover any funding gaps if the markets
do poorly—then we felt like it was a risky proposition and one that we wanted
to try and mitigate moving forward.[1]
Another
objection is that Wyoming has billions of dollars saved in special accounts so
the plan could be bailed out without a problem.
Wyoming
has six permanent funds, which, according to the state treasury’s 2013 annual
report, as of July 2013, held assets worth $16.8 billion. The Wyoming Permanent
Mineral Trust Fund, the largest of these funds, held $6.1 billion. With the
unfunded pension debt totaling about $2 billion, it would appear there is
plenty to bail it out when the time comes, right? Well, assets in the funds
themselves are supposedly untouchable. Additionally, this over taxation been
rationalized as a safety valve to cover state spending priorities during
emergencies. Should this money be used to bail out bad management decisions
instead? This is a question legislators must start asking of themselves and
their colleagues.
Another
objection heard, often from WRS employees, is: people just won’t save for their
own retirement. But if people working in the private sector save, government
workers can too. There are ways to ensure employees save even if they have a DC
plan. For instance, new employees could be automatically enrolled in a DC plan
with a choice to opt out. A new DC plan could be managed by the existing
retirement system staff, which should assuage job-loss worries at WRS.
If
new employees joined a defined contribution plan instead of the defined benefit
plan, the unfunded liability in the old plan would still be there, say
naysayers to reform. Yes, this is true, but more importantly, no new pension
debt would be created. According to the Reason Foundation’s debt
handbook.
A
DB plan’s total costs consist of two elements: (1) the normal costs of accruing
benefits, and (2) the amortization costs for unfunded liabilities (akin to debt
service). … the normal costs paid by government employers are used to prefund
the pension system. Amortization costs—the cost component used to pay down
pension debts—are separate, and the government will still be responsible for
covering amortization costs, regardless of whether normal cost contributions
flow to the old DB plan or to a new DC plan.[2]
The
last objection to reform is easily debunked: that the benefit attracts
employees. The workforce has changed and people no longer spend decades
laboring away with the same employer. In fact, the mobility of young
employables today means a portable pension such as a DC plan is more attractive
than a plan that takes years to be eligible for. In addition, a better tool to
attract the workforce of today is higher salaries, something a reduction in
pension costs would allow to the state to offer.
Let’s
face it, companies in the private sector are eliminating the risks created by
DB plans and so too should government. None of the arguments against reform
stand up to careful analysis. To ensure retirees have a pension in the future
without sacrificing the financial future of our children and grandchildren,
Wyoming’s state pension plan must be reformed.
[1] Leonard Gilroy, “Closing the Gap:
Designing and Implementing Pension Reform in
Utah—Interview
with Dan Liljenquist, former Utah State Senator,” Reason
Foundation,
September 17, 2013, http://goo.gl/fipGs6
[2] Lance Christensen, Adrian Moore,
“Pension Reform Handbook: A Starter Guide for Reformers,” Reason Foundation,
2014, p. 97
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