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.

Posted: January 25th, 2011 | Author: | Filed under: Chris Christie, Pensions | Tags: , | 6 Comments »