DEFINED-BENEFIT retirement plans are not sustainable. When the economic and demographic winds turn against them, they founder, and require onerous bailouts. That is why Washington’s legislators need to be bold in reforming public-employee pensions.
A pension is a promise of an amount of money, every month, for life. Money is paid into a fund while the employee works, the fund is invested, and the fund pays the employee in retirement.
In a world where the rates of birth, death, economic growth, market returns and bond interest are predictable, it all works. State pension law assumes such a world when it says a worker in a pension plan can never be given anything less generous. There is a risk in a promise like that, and a larger one than once assumed. Ultimately, the risk falls on the private-sector taxpayer, who is unlikely to have a similar blanket of security.
Public-employee unions argue there is no problem because in Washington all the open pension funds are fully funded. So they are, assuming a 7.9 percent future rate of investment returns. But that assumption is questionable, as is the deeper assumption that the future can be predicted.
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The other problem is course corrections. In the current system, the state actuary instructs the Legislature to make large payments — $400 million in some years — into the funds. The Legislature is free to ignore the request and often does. The fiscal irresponsibility of legislators adds another layer of risk.
What is needed is a new public retirement plan that is a defined contribution plan like the private-sector 401(k).
Two bills have been introduced in the Senate to create defined-contribution plans: SB 5856, sponsored by Majority Leader Rodney Tom, D-Medina, and SB 5851, sponsored by Sen. Barbara Bailey, R-Oak Harbor. Unlike 401(k) plans, participants in the new plans would be required to contribute a fixed 5 percent of pay if they were under 35 years old and 7.5 percent thereafter, with the employer matching 80 percent of their contribution. Employees would place their money in funds managed by the Washington State Investment Board, and at retirement would be allowed to convert their holdings into a lifetime annuity like a pension.
This does shift considerable risk to employees. There is no getting around that. But making contributions mandatory, limiting the investment options and offering annuities should reduce the risk considerably.
Tom’s bill would require all new public-employee hires after July 1, 2014, to join this plan, and all employees under age 45 on that date to roll into the new system the value of benefits accrued under existing plans. Bailey’s bill would make the new plan optional.
Tom’s bill does more, but the mandated rollover for under-45 employees is of questionable legality. Bailey’s bill is legally safer and will be easier to pass.
Ultimately, however, membership in the state’s defined-contribution plan should not be optional. All covered public employees should be in it.