In my previous post I identified a major problem looming on our financial horizon in the form of public pension underfunding.  While it is quite easy to identify a problem, the solution is not always so apparent.  I guess it’s time to roll up my sleeves and attempt to offer one.

A Defined Contribution Plan (DCP) was also created with the enactment of the ERISA legislation.  These are the 401k and IRA accounts so many of us own.  There are certain advantages to these plans over Defined Benefit Plans (DBPs).  First of all they are portable, which means if you change employers the funds can move with you.  In addition, YOU are directly involved in the investment decisions, so you can tailor them to your personal situation.  There are also advantages to the employer in that their obligation is funded almost immediately, which removes any future debt service obligation, and their contributions are a percentage of employee contributions and are not impacted by investment returns.  The accounts themselves, however, are subject to the fluctuations of the market, and as we all have seen returns are not always positive.

The first issue that MUST be addressed is the “Grandfathering” of the DBP programs for public pension, which should go the way of the dinosaurs!  As new employees are brought into the workforce, the should be placed in a DCP.  This would eventually eliminate the possibility of a funding crisis in the future.

Secondly, we need to address the existing obligations in the DBPs.  Since “enhanced” benefits created by legislation are in fact future debt obligations, any future benefit enhancements should be placed on a ballot for voter approval, just as with any other general obligation bond.  Next, there needs to be a long term averaging of actual investment return calculations to smooth out funding requirements of the programs, thus reducing the funding impact from market fluctuations.  Current regulations which allow “gaming” of the system to increase pension benefits should also be eliminated.  Lastly, public pension administrators and legislators should be held accountable for any negligence of their fiduciary duties with regard to the plans,  just as in the private sector!

There needs to be a “tiering” of benefits for new employees.  While current employees are guaranteed their benefits, the legislatures need to apply a more rational benefit curve to new employees.  Of course this could be changed again with new legislation, so it will require a watchful citizenry! 

There also needs to be a redefining of “public safety officials”, who receive enhanced benefits.  It makes perfect sense that police and firefighters would be classified as public safety officials and therefore receive enhanced benefits.  However, plumbers, cooks and landscapers should be removed from this classification.  While their jobs are important ,they do not fit the definition of public safety official. 

There needs to be a reconsideration of the retirement age for government employees.  We have watched as Social Security retirement age has increased.  If you retire earlier, you receive lower benefits.  Public employees should not be treated any differently.  DCP participants should be allowed some flexibility in deciding when to retire, since this directly impacts their retirement benefits. 

One last issue that will need to be addressed is the health care benefit for government retirees.  The retirees should be required to pay higher healthcare premiums.  With longer life expectancies, longer retirements and increasing health care costs, to expect the taxpayer to cover the increased cost alone is irresponsible.

As if this isn’t enough, there is yet another issue on the horizon – the looming retirement of the “Baby Boomers”.  There are some who believe that as the boomers retire, it will cause a major stock market decline as investments are sold to finance retirement.  While demographics clearly show that the rate of population increase has been slowing in this country, I think a stock market decline will not be as severe as some fear.  While there may indeed be a movement of retirement funds into less risky investments, I believe there will always be a certain percentage of older investors with growth as their primary investment goal.  Inflation, taxes and longer lives will all contribute to this issue.  Along with increased wages for future generations, this should ease the effect of the boomers retirement.  Why do I believe there will be higher wages?  Simple, supply and demand!  With a shrinking employment pool, there will be incredible competition for skilled workers.  Employers will need to offer higher wages in order to attract the best workers – America will continue to adapt.

This article is not intended to be a doomsday prediction.  It is merely highlighting an issue that needs our full attention.  Most of us have seen films of a rather large snake devouring some sort of nourishment.  After it eats, we see what appears to be a basketball working itself through said snake.  That, folks, is the retiring boomers!  This too shall pass!

There is far more information on this than I could possibly condense into these two articles.  Here is the link to this study so you can read it for yourself:

I feel very fortunate that the CG13 site is in existence, otherwise I would have no opportunity to bring this issue to light.  Thank you again for allowing me this forum!

Gregg: The Public Employee Pension Tax, Part II

Post navigation

Comments are closed.