In Our View: Change State Pension Plan
Defined-contribution system would make budget more sustainable
Friday, February 3, 2012
Perhaps out of fiscal desperation, or perhaps a sprouting of common sense -- likely a convergence of both -- this year’s Legislature is considering several proposals that could go a long way toward making the state budget more sustainable.One in particular caught our attention this week. It’s based on a simple question: Why not convert state workers from a defined-benefit pension system to a defined-contribution retirement program? The answer, though, is far from simple, but it is worth pondering.
The current system is as complicated as it is extravagant. The state has the Public Employees’ Retirement System (PERS), plus the Teachers’ Retirement System (TRS), plus the School Employees Retirement System (SERS), plus the Public Safety Employees Retirement System (PSERS), plus the Law Enforcement Officers’ and Fire Fighters’ Retirement System (LEOFF). We wonder if a large box of Alpha-Bits contains enough letters to accommodate such a dizzying array, and beyond the alphabet soup there’s also Plan I, Plan 2 and Plan 3.
Whether all that can be condensed into a tighter package is doubtful; negotiators don’t seem eager to coax state worker unions toward consolidation. But gradually converting from defined benefits to defined contributions should be pursued. Already in the private sector, 401(k)s and other similar plans specify contributions made by workers and businesses. They establish a reasonably reliable but still risky retirement plan based on shared investments, not on guaranteed payouts. Multiple options include lump-sum checks and long-term payments.
Such a conversion, though, would have to be gradual. Senate Bill 6378 -- which includes state Sen. Joe Zarelli, R-Ridgefield, among its sponsors -- would move the state in that direction. As Zarelli pointed out in an email to The Columbian, the bill “begins the transition away from a defined-benefit model by ensuring all new employees are placed in a hybrid system, more akin to the private sector.”
Once that transition is triggered, the state could “eliminate a long-term multibillion dollar liability that impacts state and local government employers,” according to the Republican budget leader in the state Senate. The new hybrid plan “with a smaller defined-benefit guarantee to the employee, lessens the volatility and risk for taxpayers if market returns don’t reach their expected level.”
We wish the conversion didn’t have to be so gradual, but Zarelli says, “living in my political reality, I recognized that’s not a feasible option this session.” Part of that political reality is rooted in the 2007 Legislature’s decision to replace the exorbitant gain-sharing plan with an early retirement option. So comfortable (and expensive) is that plan, it guarantees some employees with 30 years of credit the ability to retire at 62 with full benefits. Zarelli wants to repeal that bonanza, but it will take time.
No doubt, state worker unions will squawk unmercifully about this conversion. But such a change warrants approval. Asking state workers to accept the same retirement plan risks that exist in the private sector is totally appropriate, especially when the state is so deeply mired in fiscal desperation.