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Closing the Gap: Are Pensions Next?
It's on California Governor Arnold Schwarzenegger's list of possible budget-gap closers: Increase employee contributions to pension plans by an additional 5 percent of salary. Across the country, Delaware Governor Jack Markell has it on his list, too. He is considering the politically-charged step of asking employees to pay more than their current 3 percent payroll pension contributions -- an amount that is unchanged since 1976. It's hard to think of a time since the Great Depression when states have been as cash-strapped as they are now -- with no end in sight. As the Center for Budget and Policy Priorities puts it, "As we look ahead to 2011 and beyond, even as the economy appears to be moving in the direction of recovery, states' fiscal prospects remain extremely weak. Indeed, historical experience and current economic projections suggest 2011 will be worse than 2010." That being the case, it's no wonder states are looking everywhere for places to reduce costs and that pensions, which are now adding to annual budget woes, are an increasingly inviting target. How much budget sense does it make to increase employee contributions? What are some other ways for states to tame their pension costs? I talked to Teresa Ghilarducci, who sat on the Board of Trustees of Indiana's Public Employees' Retirement Fund from 1996-2002, and who is currently the Irene and Bernard L. Schwartz Professor in Economic Policy Analysis at the New School for Social Research. Here are some highlights of our conversation: ADVERTISEMENT
How would you assess the current state of state and local pension plans? Some states have to adjust their contributions because their fund is chronically underfunded or overpromised -- it amounts to the same thing. The cause for the current situation has been very bad advice from professionals. Several years ago, they were told by the consulting industry, which is backed by Wall Street, that if they invested in equity and risky assets, they would have higher returns and wouldn't have to contribute so much. That was bad math. You can't get something for nothing. Risky assets are more volatile. What's the short-term solution to the pension pressure on annual budgets? The only way to deal with these hard-to-afford pension bills is to scale back benefits, raise taxes and increase employee contributions. You have to nip and tuck. Raising employee contributions is a cut in wages. Having the contribution rate vary -- that's a terrible way to run a government. It's hard for employees to deal with the ups and downs. Interestingly, the best-funded pensions are ones where employees do contribute -- they're better managed. What's the long-term solution? You really have to look at the fundamental causes. The funds took on higher risk in investment. They have to figure out ways institutionally -- on an automatic basis -- to save money for a rainy day. Pension plans are supposed to do that. State pension plans have to figure out new math for pension investment. Keep reading >> |
Everybody's favorite solution is to cut the pay and benefits of new workers ... without asking existing workers and retirees to pay back anything.
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