While the Governor and Legislative Democrats grapple with the state’s fiscal crisis by proposing severe budget cuts matched with tax extensions, our Republican colleagues remain on the sidelines. Recently, however, they made their first demand – destruction of pension plans of public employees.
You remember retirement plans? Just about everyone working for a large company used to have one. Then some smart MBAs figured that corporations could save a bundle of money by dropping pension plans and substituting 401(k) – style benefit plans. The corporation would pay out less, retirees would reap “benefits” from a perpetually growing stock market, and investing firms would earn lavish fees. Of course, the market goes up and it goes down, and if an employee about to retire is caught on the wrong end of the graph, well life is tough.
So now our colleagues say that in order to consider letting voters decide whether to extend taxes to help fill the budget gap, Democrats must first agree to mandate that all new state employees forgo state pensions and instead contribute to 401(k) –style benefit plans.
Requiring state employees to enter into 401(k)-style benefit plans is not “pension reform”; It is the complete dismantlement of our state’s public employee retirement system and presents a host of potential dilemmas.
Retirement plans can be broken into two basic categories – defined benefits (DB) plans and defined contribution (DC) plans. Defined benefit plans pay out specific benefits to retirees that cannot be changed or limited during that individual’s lifetime. Defined contribution plans define the specific contributions the employers and/or employees make to an individual’s retirement account, but do not specify the amount of the benefit paid out upon retirement. Then there are 401(k) plans which depend entirely upon the market and an individual’s skill or luck.
Historically, public sector employees are paid lower wages than comparable private sector employees. Secure long-term retirement benefits are often the hook that keeps valuable employees in public sector employment rather than leaving to find higher wages in the private sector. Substituting a DB system with a DC system or 401(k) plan would discourage civil service employment and increase turnover rates, resulting in an inconsistent workforce and loss of institutional memory.
Studies have shown that DBs are less expensive to administer and do much better than DC systems. Average administrative costs for a DC system are 2% of assets, while a DB system costs only .18% of assets. And DB systems employ top quality investment managers, consistently outperforming DC systems in down market times.
Today many state employees contribute to both systems, often to defer taxes, and that’s well and good. And there are ways to reform pension plans that are common sense and fair. The Governor, for one, is talking about such reforms. But requiring state employees to enter into a 401(k)-style defined contribution retirement plan would put public employees at the mercy of Wall Street, and would represent a major step back to retirement insecurity, not “reform.”
State Senator Noreen Evans represents California’s 2nd State Senate District, which spans from the North Bay to the North Coast.s. Evans serves as Chair of the Legislative Women’s Caucus. This article originally appeared on her new blog.