In Our View: State Needs Pension Reform

Defined-contributions retirement plan would be better for taxpayers, workers

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Washington would be wise to gradually shift state workers from the antiquated and unsustainable defined-benefits pension plan to a more modern and sustainable defined-contributions plan such as a 401(k). State Senate Majority Leader Rodney Tom, D-Medina, has submitted a bill that would accomplish that goal, and it warrants strong consideration by Tom's fellow legislators.

As proposed by Tom, new state workers and those younger than 45 would be placed in defined-contribution plans funded largely by the employees, starting on or after July 1, 2014. Other states have either adopted this kind of retirement plan for state workers, or are moving in that direction. That trend is easily understood when one considers these reforms that Tom's Senate Bill 5856 offers:

This change would begin to level the playing field with private-sector workers, who currently pay the bulk of taxpayer contributions to support government pensions but who mostly don't get pensions themselves.

Much of the state budget will become more predictable under a 401(k) plan. Washington's long series of revenue shortfalls could be moderated by budget writers knowing how much state workers likely will contribute to their retirement and, more precisely, how much the state must provide in matching funds. That's a good deal for taxpayers.

Sure, a 401(k) is not as good a deal as a pension but if it's good enough for most workers in the private sector, it should be good enough for the public sector. And, yes, 401(k) plans in the private sector suffered during the recession, but they're bouncing back, many to levels exceeding pre-recession days. As we reported in a 2010 editorial, in 1984 there were 17,303 U.S. companies offering 401(k) plans with about 8 million participants and $100 million in assets. In two decades, participation in 401(k)s had soared to about half a million companies, 70 million participants and more than $3 trillion in assets.

As proposed by Tom, Washington's defined-contribution retirement plan would be more attractive than what generally is found in the private sector. Employers would contribute between 5 percent and 7.5 percent of their salary to accounts, 80 percent of which would be matched by the state. Private-sector 401(k)s typically have company matches of about 50 percent; some companies have even had to stop the matching contributions during the recession.

The defined-contribution retirement plan could feature a substantial degree of portability. Details of the proposal have not been finalized, but Florida is considering a 401(k) for state workers that, according to http://www.newsherald.com, would "travel with the employee from job to job … appealing to employees who don't remain in public service long enough to earn a cushy pension."

A 401(k) here could provide state workers with more flexibility in deciding contributions, as opposed to the current one-size-fits-all pension plan.

Tom's bill likely will face criticism -- and could even be blocked -- in the Democrat-controlled state House. But it's time for the discussion to accelerate, and for the state to move beyond the myriad outdated and unsustainable pension plans.