Posted by
John R. LaPlante on Friday, October 06, 2006 4:41:24 PM
Note: This is one of a series of observations from the Education Reform Summit / Annual Meeting of the State Policy Network, being held in Milwaukee.
You may know that Social Security is a fiscal disaster in the making. You may even know that Medicaid and Medicare and threatening state and federal budgets. But did you know about the other looming fiscal crisis, retirement benefits for public employees? General Motors faces an unfunded liability of just over $90 billion. For governments across the country, that number is $300 billion to $800 billion.
The private sector has moved toward a defined contribution system, with two-thirds of all retirement plans being of the defined contribution (DC) variety. Why the switch from the old-style defined benefit (DB) plans? Companies see the writing on the wall. In a global market, they must be able to compete on fiscal terms, and they cannot afford to continue on the current path. Further, increased mobility of workers mean that DC plans are required to attract employees who won’t be happy with DB plans, which penalize job-hoppers.
But only 90 percent of all public sector plans are DB plans—and they are generous plans at that. For political reasons (buying labor peace, campaign contributions, and votes), public officials are tempted to increase benefits through making benefit formulas richer, reducing the retirement age, and taking other steps that bring visible rewards today but costly obligations later on.
Officials must take one of three actions, or a combination thereof, to deal with the unfunded liabilities: raise taxes; cut benefits, or make reforms to pension programs. Moving toward DC plans is part of that reform. (Unlike companies, governments can’t discharge their obligations through bankruptcy.)
California has already gotten itself into deep trouble with retirement costs. The state has long been a trend-setter, and in this case, it’s a bad thing.