In Our View: Reform State Pensions
Early-retirement plans are unsustainable; defined contributions preferred
Monday, March 26, 2012
While private-sector employers shift away from pensions toward defined-contribution plans such as 401(k)s, state governments continue to rely on outdated and unsustainable pensions. Predictably, the lingering economic recession has forced lawmakers into considering reforms. Washington state is no exception.We are in better shape than many other states -- the Pew Center on the States lists Washington among four states whose pensions systems are in the best shape -- but we simply cannot continue down the same path and expect these serial deficits to disappear. The current special session of the Legislature is an excellent opportunity to reform state pensions.
According to the Washington Policy Center: “Long-term projections show pension costs accounting for nearly $4 billion of state spending by 2025. This makes pension obligations one of the largest cost drivers lawmakers will face over the next decade.”
Through the 1990s, the state contributed to pensions as required, but in the following decade, only 58 percent of the required contributions have been made. Simultaneously, pension benefits have expanded with such unsustainable comforts as early retirement for those with 30 years’ experience (a change made in 2000 at a cost of $2.3 billion), plus a $2.5 billion increase five years ago to compensate for unions agreeing to drop gain sharing. During boom times, gain sharing was a practice that enhanced pensions but did little to protect the systems against the ravages of the recession that followed.
The WPC reports that these developments in recent years “led the state actuary to the common-sense recommendation that legislators make 100 percent of the actuarially required pension contributions and avoid large benefit improvements until the risk and affordability problems of the current pensions improve.”
These trends ought to be especially worrisome to state workers, because they are the chief stakeholders in this issue. But, of course, state-worker unions fiercely oppose pension reform, ignoring the fact that current pensions are unsustainable.
Two recent comments in The Seattle Times explain why reforming early-retirement provisions would be justified. State Sen. Joseph Zarelli, R-Ridgefield, said: “In this age, with people working longer and living longer, the reality of what this (early retirement) benefit provides, while nice, is not sustainable over the long haul.” And state Rep. Deb Eddy, D-Kirkland, said: “Conditions have changed. Life expectancies have changed, and I think if we don’t start tackling it, the public is going to continue to look at government and say, ‘Get your act together.’ ”
We agree. The complexity of the state pension is vast, but two relatively easy solutions make perfect sense and are worth pursuing: End early retirement provisions but only for newly hired employees and convert state retirement programs from defined benefits to defined contributions. Otherwise, taxpayers’ investment in state government will become even more unsustainable.