Could a drive to improve retirement security in the private sector undermine public employee pensions?
It’s something the CalPERS board is being urged to think about.
The stock market crash last fall had very different impacts on government pensions and the 401(k) individual-investment retirement plans widely used in the private sector.
Government retirement systems have to worry about rebuilding their pension funds without squeezing taxpayers or forcing deep cuts in other government services. But their retirees will continue to receive monthly checks.
In the private sector, individuals with 401(k) investment plans devastated in the stock market crash are simply out of luck, if they can’t wait years or decades for earnings to rebuild their funds.
Now there is at least one organized drive, Retirement USA (and reportedly talk among other groups) pushing for an overhaul of private-sector retirement plans and extending coverage to the half of all U.S. workers who only have Social Security.
The federal lobbyist for the California Public Employees Retirement System told the board last month that CalPERS should get involved in the coming “national conversation” about retirement reform for two reasons.
The giant system is a “leading retirement authority,” and a sweeping change in the private sector could result in a “lowest common denominator” retirement plan instead of a more appropriate higher standard.
“I’m sure you can all imagine the lowest common denominator could be detrimental to the kind of plans and programs that we all believe in and work every day to try to protect,” said Tom Lussier, the CalPERS federal lobbyist.
Responding to questions from board members, Lussier said, “There are all kinds of ways in which the Congress could advance issues that could either further isolate the pension plans in the public community or disadvantage them.”
A large and aggressively growing labor union with members in the private sector and government, the Service Employees International Union, is part of a coalition pushing for a new retirement system to supplement Social Security.
The coalition, Retirement USA, also includes several non-profit, activist and think tank-like organizations: the Pension Rights Center, the Economic Policy Institute, and the National Committee to Preserve Social Security and Medicare.
At a news conference last month, the coalition outlined principles for a new Social Security supplement and invited others to submit proposals to be considered at a conference this fall.
In Retirement USA the “U” means “universal” coverage for everyone, the “S” means “secure” lifetime stream of income like a monthly check, and “A” means “adequate” standard of living.
Much like a government pension plan, the coalition principles say employers and employees should be required to contribute a specific percentage of pay. And the government should subsidize the contributions of low-income workers.
In pension lingo, government pensions are called “defined benefit” plans because of the guaranteed monthly check to retirees. A 401(k) is a “defined contribution” plan because the worker, and usually the employer, put money in the investment plan.
Critics of government pension plans say powerful unions have negotiated labor contracts with overly generous pension benefits, allowing retirement at age 50 or 55 with up to 90 percent of the final salary.
Among the rationales for big pensions are retaining employees by offering competitive benefits, often with other government agencies. In good economic times, earnings from pension fund investments can cover much of the increased cost.
The San Diego city retirement system, now saddled with a deficit of more than $2 billion, got into big trouble when officials reduced contributions and raised benefits, expecting investment earnings to cover the gap.
Public approval of generous pensions for police and firemen, whose jobs put their lives on the line, is said to have helped open the door for other government workers to get increased benefits.
Some individual government pensions can seem excessive. For example, Berkeley reportedly gave its city manager a raise to keep his salary above the pension income he would receive if he retired.
In the private sector, there has been a trend among large businesses to switch from pensions with guaranteed monthly payments to the 401(k) individual tax-sheltered investment plan.
The retirement plan becomes a predictable annual cost with no possibility of developing a crushing “unfunded liability” for pension payments in the future. Some old-line “legacy” corporations are hampered by massive pension debt.
Gov. Arnold Schwarzenegger backed a plan to switch new state and local government workers to 401(k) plans. But it was dropped from his ill-fated package of “Year of Reform” initiatives in 2005 in a dispute over death and disability benefits.
Former President George W Bush, after his re-election in 2004, unsuccessfully proposed a Social Security change that would allow individuals to put part of their payroll tax into a 401(k)-style investment plan.
Critics have said, among other things, that many 401(k) plans have excessive managerial fees and that individuals tend to make poor investment choices. The once-trendy 401(k) has been taking more lumps since the market crash.
At a congressional hearing in February, Alicia Munnell of the Center for Retirement Research at Boston College said that when the 401(k) arrived in the early 1980s it was intended to be a supplement to employer plans and Social Security.
“My conclusion was that exclusive reliance on 401(k) plans was a catastrophe in the making,” said Munnell. “But I thought the dimensions of the problem would not become clear for another 10 or 15 years when large numbers of people retired relied solely on Social Security and 401(k)s. Instead, the financial crisis has accelerated a re-examination of our retirement income system.”
A bulletin issued in December by the AARP, formerly the American Association of Retired Persons, gave an even-handed but critical appraisal of the 401(k) in the wake of the crash.
“Even when things are done right, there’s no guarantee of a reliable retirement income stream,” said the AARP article. “Because the plans are tied to the market, workers who have had the misfortune to retire during a downturn could outlive their savings—a signal of a failing retirement system.”
At a legislative hearing in Sacramento last month, the chairman of the state Senate retirement committee, Lou Correa, D-Santa Ana, talked briefly about the debate between “defined benefit” and “defined contribution” plans.
“Some time later with the committee I would like to have a hearing on this,” said Correa. “It’s a big issue.”
Ed Mendel is the editor and publisher of Calpensions, a new online news source for government pensions. Mendel, an expert on the state budget and finance, covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. All of his stories are available at http://calpensions.com.