We shall all consider ourselves unauthorized to saddle posterity with our
debts, and morally bound to pay them ourselves.
Thomas Jefferson, 1813
Pension
misunderstanding and misinformation are alive and well in Wyoming. Talking
about pension reform raises both hopes and hackles. While many worry about the
legacy of pension debt, the resulting tax hikes and service reductions
imperiling future generations, others drag out the litany of common, but
incorrect, objections to reform. Presented below are a few of the favorite
objections, to which we’ve responded.
Claim: Offering new employees a
defined contribution retirement plan (DC) instead of a defined benefit plan
(DB) and raising their salary would not save taxpayers money. You simply
switch costs: salaries versus retirement.
Fact: A widespread argument against
moving new government employees from a defined benefit pension (DB) to a
defined contribution pension (DC) plan is that little real savings would result
because salaries would be increased to make up for reduced benefits. Salaries
are already rising without the shift to a DB plan. The last thing taxpayers can
afford are both higher salaries and the unknown future cost of unsustainable benefits.
However, the fundamental principle forgotten here is that today’s taxpayers
have a moral responsibility to pay for what they voted for. Higher salaries are
paid by today’s taxpayers, who ratify the lawmakers’ decisions by voting for
those who promise higher salaries. Separating salaries from egregious pension
benefits – as happens in pension reform – ensures that higher pension debt is
not offloaded to future generations. Our children and grandchildren – people
who have no way to protect themselves from profligate politicians – should not
be saddled with a future tax liability that they had no say in deciding.
Claim: If the Wyoming Retirement
System (WRS) has to administer two totally different programs the
administrative costs will skyrocket, so less goes to the retirees but more to
run the system for little or no savings.
Fact: The WRS already administers
two entirely different programs: the defined benefit and the defined compensation
program. True, adding a defined contribution plan would entail an
additional cost because these types of plans are individualized according to
the personal requirements of each member, however, according to a report by the
Center for Retirement Research at Boston College, the average administrative and
investment costs for DB plans and DC plans were 0.43 percent and 0.95 percent
of assets, respectively. However, depending on the formation of the DC system,
one way that these costs could be minimized is by requiring the use of indexed
funds. More importantly, moving new employees to a DC plan would eliminate the
possibility of billions of dollars of new unfunded liabilities. As an aside,
the cost to run the WRS has already skyrocketed. Between 2004 and 2013 WRS
administration costs rose by 300 percent. Skyrocketing costs at WRS are another
issue entirely.
Claim: DC plans require each worker
to become their own investment specialist and as a result, their retirement
fund is significantly lower than what a DB plan would provide. Additionally,
there is no protection should the retiree outlive his or her funds. These
retirees would then become recipients of other welfare programs such as food
stamps and Skilled Living Centers.
Fact: As the majority of private
sector employees participate in DC plans, options in the market have increased
tremendously and costs have declined. Looking at Wyoming’s colleges and
universities, around 40 percent of the faculty and staff elect a defined
contribution system (currently administered by TIAA-CREF) and it’s not evident that
there is a problem in investments or retirement security for our educators.
Indeed, only when one holds their own money in their own account can they be
sure they will have an income in the future.
Given
that some cities, such as Central Falls, Rhode Island, Pritchard, Alabama and
Detroit, Michigan, are reducing the pension benefit to existing retirees, and
according to hedge fund Bridgewater Associates, 85 percent of public pension
funds could go bankrupt in three decades, perhaps we should be more concerned
about what state employees still in the plan will do should the state renege on
its pension promises.
Claim: We take out 30-year loans to
buy a house. Retirement system project in 30 year cycles too.
Wyoming has close to 80 percent of the funds necessary to get us through
the tough times.
Fact: Using the mortgage analogy,
while simple, is not strictly comparable because investments in pension funds
are not going to reduce liabilities on an actual asset, like a house. Paying
into a pension system is more like paying off a credit card. The funding ratio
of a pension plan, quite simply, is assets divided by liabilities. Currently,
the funding ratio of Wyoming’s state pension plan is approximately 77 percent,
meaning it does not have enough money to pay its promised benefits to those
contributing into the system. But by not paying off the credit card bill
consistently – even with a couple of large payments – means that lawmakers are
consistently underfunding the system and it will be very difficult to account
for all liabilities in the future. If all the funding assumptions were met and
contributions made, the plan would not have an unfunded liability.
Again,
thinking that this liability could be paid off in 30 years, much like a 30-year
homeowner loan, might seem logical on the surface, however current taxpayers
should be paying for the retirement of current government workers, not leaving
the burden of payment to their children and grandchildren.
Claim: The legislature has done a
very good job of tweaking the system to improve its future and is projected to
reach 100 percent funding in around four years if we can survive any
significant downturns.
Fact: Making any fiscal plan
contingent on surviving significant downturns is highly irresponsible and short-sighted.
This also implies that pension funds are invested in riskier assets to provide
for higher returns, which usually depend on economic bubbles. In a brief flurry
of feigned fiscal responsibility, Wyoming’s legislature made a very significant
tweak to the pension system when it eliminated the cost of living (COLA)
adjustments in all but the Fireman A pension plans. While a step in the right
direction, the main goal of this reform was to delay, but not eliminate, the
collapse of the retirement system. Politicians are interested in ensuring the
plan remains in place during their tenure in office. What happens once they are
gone is of little concern.
In
addition, COLA elimination and plan contribution increases mean the plan might,
should all assumptions (AKA crystal ball gazing) pan out, be fully funded not
in four years, but in 30 years—2043 according to the WRS.
A
concerned Wyoming Public Employees Association member did make one good point
after a recent expression of the above litany. He decried politicians’
proclivity for corporate welfare, the use of hundreds of thousands of dollars
to create tens of jobs in the state. This misuse of tax dollars could
potentially leave retired state employees waiting at their mailbox for a
pension check that never comes.
If
we want less political gamesmanship with our state’s pension funds, we should
remove the temptations from elected officials to play with our money, and give
the benefits our public servants deserve to them to manage, just like they
manage all of their other bills. It is time for state bills to be paid for when
they are incurred, not left for future taxpayers to fund.
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