OP-ED: Defending Defined Benefit Plans
These days the media rely on sensationalism to sell. Editors and publishers assume the public won’t pick up a paper or click on a story without headlines like, ‘Amazing Bat Boy’ and ‘Starlet to Wed.’
Maybe that’s why, in my opinion, the not-so-sexy truth about state employee pensions and their history isn’t being told.
That doesn’t mean that the background isn’t vital. It is, and the facts must be presented. What the media and the general public need is a historical perspective on how and why pensions work for public service workers and taxpayers.
A recent report claiming that Connecticut’s pension plan ranks as the fifth-worst in the nation has fueled much of the latest sensationalism. The report cited a $9 billion increase since 2000 in the total liability of the state employee pension fund, when in fact it is almost half that number.
The inflated figure includes the Teachers’ Retirement System fund, which does not cover retired state employees, and which is not negotiated. The teachers’ pension was in such bad shape that the legislature created a constitutional funding obligation three years ago. It serves as an example of the need for collective bargaining and forced funding of pension plans.
Since its first-ever agreement with its unionized workforce on pensions in 1981, Connecticut has been fully funding the normal costs of the fund. Only twice over the past 29 years have payments for past liabilities been deferred, in each case to help weather major economic crises.
Since we began collective bargaining nearly 30 years ago, our unions have pressed politicians to make the normal costs as well as payments towards the past unfunded liability. Before 1981, politicians kept grabbing from Peter to pay Paul when they were unable to balance their budgets. Our unions knew this was an unwise funding method, and insisted it be changed.
Some have argued that State workers’ benefits are too generous and have become unaffordable. The reality is that 25 years ago union negotiations produced changes so that the cost of pensions for employees hired after 1984 is about 7 percent of payroll, typical of many large corporations. Changes negotiated in 1997 further reduced costs, so that pension costs less are than 4.7 percent of payroll for employees hired in the past 13 years, far less than many large corporations pay.
In 1984, we instituted reforms advocated by a recent Pew Research Center study such as fully funding the pension obligation every year. The reality is that State workers already had a pension plan that is reasonable by all measures.
Connecticut is simply paying now for the damage created by five decades of politicians who could not show restraint or fiscal foresight.
But what about moving State workers to a defined contribution plan, like a 401(k) savings account, as some candidates have proposed, and as some private sector businesses have already done to their employees?
Because switching to this type of savings plan today would not solve the problems created in the past. Taxpayers would still be on the hook for the liability created primarily by not funding the pension plan before it was negotiated with the unions.
And these types of savings plans would create future problems. They have higher administrative costs because they cannot compete on the economies of scale that defined benefit plans offer, so they actually produce less benefits per dollar invested. That’s a foolish waste of taxpayer money.
Economic instability is another reason to steer clear of these types of savings plans. One only needs to see how recent market volatility has crushed workers with 401(k)s and the ripple effect it has had on the entire economy. Defined benefit plans work because large employers like the state can handle the ups and downs of the market, even when individual workers cannot.
Defined benefit plans work just like Social Security, in that they are stable and predictable sources of income for seniors. The U.S. Census Bureau reported that for every $1 that taxpayers invest public plans, an additional $3 is re-invested back into the economy. Connecticut’s small businesses and local municipalities desperately need that influx of cash flow.
Seniors should not have to rely on being lucky enough to retire when the stock market is up, or unlucky if they do when it’s down. The bottom line is that they shouldn’t have to gamble with their golden years, or leave us as taxpayers to foot the bill if they make the wrong roll of the dice.
Simply put, there’s no comparison when it comes to defined benefit and defined contribution plans. In a 2008 report by the National Institute of Retirement Security called “Better Bang for the Buck,” the authors found that a traditional pension costs an average of 12.5 percent of payroll while a comparable 401(k) costs almost 23 percent.
Sometimes the facts aren’t as sexy as editors like, but they sure are convincing. These numbers don’t lie.
Catherine Osten is a correctional lieutenant with 19 years of service in the Connecticut Department of Correction and is President of CSEA/SEIU Local 2001, one of the thirteen unions in the State Employee Bargaining Agent Coalition (SEBAC).