Why Do We Have A Pension System?
By Art Gallagher
Governor Chris Christie says that the rest of America is looking to New Jersey for the way forward in restoring fiscal sanity to state governments after decades of kicking the can down the road to the next generation. Christie rightly says the day of reckoning has arrived and that he is the man to lead New Jersey back to prosperity to provide the rest of the country an example of how to do it.
On the question of government employee pensions and health care benefits, the governor has proposed a series of reforms that will reduce New Jersey’s unfunded liabilities from a current estimate of $183 billion to $23 billion in 30 years. Christie’s reforms would require all government employees to contribute 8.5% of their salaries to their pensions, raise the retirement age from 62 to 65, roll back the 9% increase the Republican legislature gave away a decade ago, and reduce the anticipated return of the pension investments from 8.5% per year to 7.5%. Government employees would have to pay 30% of their health care premiums, with the government picking up the other 70%.
That sounds like a good plan on paper. It assumes the current and future administrations and legislatures will fund their portions of the pension and health care obligations, which given recent history is a risky assumption. The 7.5% projected return could easily turn out to be too optimistic. If the cost of heath care continues to escalate as it has over the last decade, deficits will continue to rise.
Still, Christie’s plan is a good answer to the question, “How do we save the pension and health care system from insolvency?”
As New Jersey, and many other states throughout the nation confront cumulative unfunded liabilities in the trillions of dollars, our leaders should confront a more fundamental question; “Why do we have defined pension benefits for government employees?”
Who besides government employees and union employees of once great corporations that have been bailed out by the federal government still get defined benefit pensions?
Are pensions necessary to attract qualified employees into government service?
Who is the pension system for? If it is for the citizenry, i.e. we the people get a better government, for us and by us, because we guarantee our employees lifetime benefits, then perhaps it is appropriate to tax money out of the private economy to provide those benefits.
But can anyone really make that argument? I would love to hear it.
Will government jobs really go unfilled if we don’t have a pension system? Will we get less qualified employees? Where will the more qualified employees go to work? Where will they find employment that guarantees a level of income for their retirement?
Nowhere, I think. If a reader can correct me on that, please do.
The pension problem should be addressed inside the context of this more fundamental question; Why do we have a defined benefit pension system? Should we have such a system?
If New Jersey’s, and many other states’, pension systems were private company pension systems the federal government would have shut them down years ago in favor of 401K type plans.
That is what state governments, lead by Chris Christie of New Jersey, should do now. Liquidate the system and shut it down. Those who are already retired and within a short time of retirement should get the pensions they were promised.
The $40+ billion in the pension plan should be equitably distributed to its owners, the employees, and invested in retirement accounts of their own choosing. With 800,000 people in the system, each future retiree would get a healthy initial investment into their plan. Those with a longer terms of service would get more, with those who have paid less into the system getting less.
Going forward, just like the private sector, employees and employers should participate in pay as you go retirement plans.
The private sector addressed this problem 30 years ago. It is not rocket science. There is a model for solving the problem. Christie and the other governors, should follow that model.
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The problem is how do you address the 20-30 year class of employees, nearing retirement?
With regards to teachers, back some 25 plus years ago; teacher pay was near the bottom of the scale. They signed on with the promise of certain benefits when they retired and now they are getting there, some only a year or two away? Are we to rip that promise away from these people who have little time to adjust?
BY ALL MEANS…we have to work our way into a different system, but I suggest it needs to be done in a tiered (spelling?) system, with those having 25 plus years of service left under the old plan.
The 15-25 years of service class should be offered some blend of options with less than 15 years moved into a pure 401K style program.
They did their service and most did it well.
Even President Bush recognized that in his plans to privatize Social Security. I believe the cut off age was 55, with those older not being required to participate in the “personal investment” option.
Freespeaker,
Those 20-30 year employees would get a bigger share of the $40B pie.
Art:
A defined contribution plan (ie – 401K for private sector employees or a 457b for public employees) was originally designed to supplement, not supplant, the defined benefit system.
There is no question that a defined benefit pension plan is suffering from serious problems, from not enough contributions by the employees to insufficent funding by the employer, as well as a disastrous tanking of the stock and bond markets.
In NJ, the government took money from the public pension system, and drastically cut back what they should have been paying to fully fund (starting with Christie Whitman).
Donnie DiFrancesco and a GOP legislature decided to give a 9% increase, not just to current public employees, but ALL retired employes as well.
My suggestions are as follows:
All public employees must have their pension deductions increased substantially (including police, fire and judges) to 15% of their base salary.
All public employees must pay 30% of the actual cost of their health care (a single person would not pay the same rate as a family); this would flucuate every year based upon actual costs. Once that percentage is set, you don’t have to negotiate it every contract, the amount is a percentage of actual cost.
In addition, I would recommend a 10% cut in base pay for every current public employee, with the entire resultant savings dedicated to re-funding the pension systems (PERS, TPAF, PFRS and Judicial).
I would also recommend not only changing the pension benefit calculation from 1/55 back to 1/60 (rescinds the 9% DiFrancesco giveaway) but actually make it 1/65 as well as capping any public employe pension at no more than $5,000 per month. No more $100,000 plus annual pensions.
I would restrict eligibility for a public pension to all current employees. Those hired after a certain date would be in a defined contribution plan, with an appropriate level of certain funding by the public employer.
over generations is the main reason for the mess,and raiding the fund to pay for more programs to get votes, and then managing the money improperly ( a la Corzine’s gang and others with certain “investment”scemes), which put the fund in even more arrears.. this has been, and is, a union state, with much more in public unions than private..years of capitulation to unions for PAC contributions and endorsements added to the problem.. look at how Bush was trashed for even trying to suggest personal retirement accounts, with just a PORTION being invested for new/young workers!.. my main gripe, now that it’s over- extended, is with those who should really get much of the blame, on both sides, for those “pigs” who gamed the system with so many pensions, with their families getting pensions, lawyers in towns,and judges getting pensions, the double and triple, multiple-office-holding elected pigs, who are now out, and living higher than they should have.. and, as stated above, for years, the trade-off for gov’t employment’s generally lower salaries, was the promise of a pension after one whole career..now that the over-taxing and over-regulating has crashed the econmoy and the private sector salaries are down, the impression pervades that it’s al the gov’t. employees’ fault.. I think not..I am for trying individual accounts, am for penalizing the multiple-dippers, am for re-negotiating sky-high agreements which the gov. bodies voted to obligate,( again, to make voting blocs happy, to get re-elected),but, those who consistently paid in and did their time fairly deserve to get what they were promised..and again, WHERE are the spending/program cuts that need to accompany any changes to the system??.. it can’t be just one group to be targeted and to suffer, as the be-all and end-all to a larger problem!..
Our politicians have played fast and loose with the pension monies in contract and labor negotiations. Debate on these points will occur in the courts, in the arbitration hearings, and in the streets. A central question will be “should the entire general population be held liable to provide for the retirement of the few in the employ of the governmental units?”
Should all be required to pay for the benefits of those few, when they themselves are not eligible for such levels of “pensions?” Hummm…?
Art, you are a coward. You ought to be ashamed of yourself for censoring those comments that are critical of those Republicans that you admire and/or those Republicans that sponsor this site.
http://txlady706.wordpress.com/2010/06/16/new-jersey-assemblyman-david-rible-scams-state-board-for-disability-totally-and-permanently-disabled-man-competes-in-5-mile-run-and-has-gym-membership/