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Posted April 12, 2007 The full Governing Management Letter | Subscribe to The Governing Management Letter GIRARD MILLER’S BENEFITS BEAT Bonus column: What’s Right With Public Pensions A ‘Pension-Purchase Option’ Questions, success stories or anecdotes about benefit issues in government? From my columns highlighting possible reforms of the nation’s public sector benefits systems, I’ve had a few defensive e-mails from advocates of traditional pensions, who sometimes feel picked on. With the relentless media focus on abuses, funding shortfalls and taxpayer resentment, a siege mentality has developed in some localities. So, in the interests of balanced commentary, I’d like to devote this column to what’s right with public pension systems. 
Similar sympathetic observations appear in recent articles and reports by various authors posted on the National Association of State Retirement Administrators’ Web site. As the nation moves increasingly toward defined-contribution retirement plans in the private sector, some 90 percent of public employees still receive defined benefits, and many would prefer to do so. There is a lot to be said for a defined-benefit plan if it is operated on a sustainable basis. That’s easier said than done, of course, but let’s start with three cornerstone advantages:
First, a defined-benefit pension is the more certain way to assure retirement security. Studies have already shown that workers in the private sector are not saving enough in their 401(k) and other personal retirement accounts to provide for sufficient replacement income upon retirement. A pension plan does that by providing a formula assuring long-term employees that they will generally receive 60-80 percent of their final compensation through a pension often supplemented by Social Security — regardless of swings in the stock market. For employees who go the distance of a 30-year career, that’s hard to beat. Second, most of the larger state pension plans are more investment-efficient than defined-contribution plans. They retain experts to allocate their assets, and invest their money with lower fees than those which individuals must pay for mutual funds in defined- contribution plans. Although pension trustees do make investment mistakes, their long-term performance usually exceeds that of many individual employees who tend to buy high and sell low, chasing past performance or trading impulsively. Third, and perhaps most important, a pension plan absorbs longevity risk. People are living longer, which means more retirees will outlive their modest savings. That will especially be a problem for defined-contribution-plan retirees. Statistically, half of us outlive our average life expectancy. Retirees in pension plans may not leave much to their estates, but at least they will still receive a check in their 90s if they outlive the averages. If a modest cost-of-living adjustment is prudently built into the plan design, pensioners can avoid eating cat food in their final years. Pension-purchase option. On this latter point, one of the great contributions that public pension systems can make to society is to offer a pension-purchase option to retirees in defined-contribution and deferred-compensation plans. The life insurance companies will hate this, but the fact is that public plans can provide annuity-like pensions to governmental retirees with actuarial investment returns far superior to the private sector. That’s because public pension funds can afford to underwrite the actuarial risk of stock market volatility across generations. And last year’s Pension Protection Act opened the door for such pension-exchange features with the so-called “air time” provisions that allow employees to purchase “service credit.” Thus, a conservative police officer could trade her individual 457 account balance for a supplemental life pension at fair actuarial rates — and not worry about investing her money in stocks or bonds, or buying a lower-yielding annuity from an insurance company. In light of this incredible strategic advantage, it’s surprising that we haven’t yet seen a state pension system offer a sidecar 457 or 401(a) plan with a pension-purchase option. I can’t imagine a public employee who wouldn’t want to enjoy access to a pension-purchase option as part of the menu. Offering that kind of flexibility would certainly be a winning strategy in the DB-DC competition. Instead of fighting defined-contribution plans, why not outfox them with a superior hybrid that provides prudent options going both ways? Portability. One more constructive suggestion for public pension plans: Offer nationwide portability and transferability between public employers. If a traffic engineer or teacher relocates to a similar public-service job in another state, why not offer reciprocal benefits and a transfer of service credits? A multi-state cost-sharing treaty would be necessary, but certainly the astute state retirement plan administrators can figure this out. Intrastate reciprocity should be a no-brainer. Retirement plan portability would maximize talent in the public service and emphasize careers over location. Sustainability.. With these strong foundations, properly designed pension plans can thrive in coming years, as long as they refrain from ratcheting up their earnings assumptions and benefits formulas each time the market reaches new highs. Making sure that benefits do not widely outstrip those received by ordinary taxpayers is also essential to long-term success of public pension plans. My hat’s off to those who do it right! Last month: Girard Miller, an analyst of benefits and investments with 30 years of experience in the public, private and nonprofit sectors, can be reached at Girardinmalibu@charter.net. © 2007, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc. |
