American employee retirement strategies in recent years have shifted heavily toward 401(k) plans. According to the Employment Benefit Research Institute, in 1984 there were 17,303 U.S. companies offering 401(k) plans, with about 8 million participants and $100 billion in assets. In just 22 years, by 2006, about half a million companies had 401(k) plans with 70 million participants and more than $3 trillion in assets.
Of course, those investments took a hard hit during the recession, but most 401(k) plans are rallying steadily and, with continued investments by both employee and employer, many of those plans have surpassed pre-recession levels.
State Sen. Joe Zarelli, R-Ridgefield, wants to replace the state’s cumbersome and unreliable pension program with something like a 401(k) plan. Such a plan already exists as an option for higher education employees; most have chosen that option and are pleased with it, Zarelli says. He has tried to launch discussions in the Legislature about reform, but in vain. Zarelli says he will try again in 2011.
He should, because his proposal holds great potential for three stakeholders. State workers, although losing the guaranteed income that a pension promises, could enjoy the same investment victories that private-sector workers have seen. Second, state lawmakers could take advantage of a large solution to the budget-deficit woes. Third, taxpayers would be able to escape the constant threat of underfunded pensions, which ultimately they must pay.
In this regard, the public sector is more similar to the private sector than many people believe. Taxpayers are the employer and state workers are the employees. Zarelli’s proposal scares many people because the retirement strategy for state workers would shift from a defined benefit plan (guaranteed fixed monthly payment) to a defined contribution plan (state workers contribute to their retirement, the state matches it, and employees wield the substantial clout of adjusting those contributions).
Defined contribution plans work splendidly in the private sector, and there’s no reason they can’t work equally well in the public sector. For example, many state workers may want to accelerate retirement savings, perhaps as empty-nesters, when they can pump more money into a plan. The state would match that acceleration to a point, which typically is about a 50 percent match up to about 6 percent of the salary. Under a pension, state workers don’t have that flexibility.
Many pension proponents worry about state workers being forced to make crucial investment decisions that they currently don’t have to make. Zarelli, though, says his model of a state retirement plan would continue the role of the State Investment Board making those decisions for state workers. Others worry about current state workers being jolted by changes in existing pension, but Zarelli says his proposal would phase in the new strategy, and no current pension holder would be affected.
With this change, taxpayers wouldn’t have to face the constant dilemma of unfunded pensions. Nor would legislators have to continue facing that burden during budget-writing sessions. Adopting a defined contribution plan would set employers and employees on a more reliable retirement course.
According to Kathie Durbin’s story in Sunday’s Columbian, 10 public employee pension plans are fully funded but two older plans have been underfunded for years. This has created a current unfunded pension liability of $6.9 billion, or about $3.8 billion for the state and $3.1 billion for local governments. That defines the urgency with which the Legislature must address this problem in 2011, and listening to Zarelli is a good place to start.
