IF Washington’s public pension obligations were measured by the same standards as private pensions, the current investment funds would fall short by tens of billions of dollars. That is the gist of Seattle Times reporter Drew DeSilver’s story in last Sunday’s Times.
These are estimates. The state has estimatesthat show no gap on plans now open to enrollment. By the state’s estimates, its system is solid. The gist of DeSilver’s story was that by the private sector’s methods, the system is not solid.
The less optimistic method is appealing for one overriding reason. In the past few decades, the Washington State Investment Board, which manages public pension money, has earned an average of about 8 percent. It is a fine performance, and the state assumes something like it will continue forever.
But since the recession, the real economy has shifted into low gear. And with the Dow Jones Industrials at their all-time high and bond yields at lows not seen since the Truman administration, the odds do not favor returns that high.
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If the state’s forecast return (officially 7.9 percent) is too high, the Legislature has a problem. It has promised a benefit for state employees at a level the funds may not cover. And once government promises an employee a retirement benefit, it is stuck. If the fund won’t cover the promise, the taxpayers have to. Under current law, the state is free to weaken the promise only with new employees.
At least it should do that much. It should close all plans with defined benefits and move entirely to a system of defined contributions.
Most of the private sector, which by law has had to use more pessimistic assumptions than the state is using, has made the move already. According to the Employee Benefit Research Institute, by 2011 only 14 percent of private-sector workers were covered even partly by defined-benefit plans and only 3 percent were covered solely by such plans.
Under a defined-contribution plan for public employees, there would be no large future liability to argue about. The employer and employee would pay in defined amounts, the Investment Board would invest the money and the employee would get the result. It is a system that is generous if the future is generous.