The private sector, public employee pension gap

Could a drive to improve retirement security in the private sector undermine public employee pensions?

It’s something the CalPERS board is being urged to think about.

The stock market crash last fall had very different impacts on government pensions and the 401(k) individual-investment retirement plans widely used in the private sector.

Government retirement systems have to worry about rebuilding their pension funds without squeezing taxpayers or forcing deep cuts in other government services. But their retirees will continue to receive monthly checks.

In the private sector, individuals with 401(k) investment plans devastated in the stock market crash are simply out of luck, if they can’t wait years or decades for earnings to rebuild their funds.

Now there is at least one organized drive, Retirement USA (and reportedly talk among other groups) pushing for an overhaul of private-sector retirement plans and extending coverage to the half of all U.S. workers who only have Social Security.

The federal lobbyist for the California Public Employees Retirement System told the board last month that CalPERS should get involved in the coming “national conversation” about retirement reform for two reasons.

The giant system is a “leading retirement authority,” and a sweeping change in the private sector could result in a “lowest common denominator” retirement plan instead of a more appropriate higher standard.

“I’m sure you can all imagine the lowest common denominator could be detrimental to the kind of plans and programs that we all believe in and work every day to try to protect,” said Tom Lussier, the CalPERS federal lobbyist.

Responding to questions from board members, Lussier said, “There are all kinds of ways in which the Congress could advance issues that could either further isolate the pension plans in the public community or disadvantage them.”

A large and aggressively growing labor union with members in the private sector and government, the Service Employees International Union, is part of a coalition pushing for a new retirement system to supplement Social Security.

The coalition, Retirement USA, also includes several non-profit, activist and think tank-like organizations: the Pension Rights Center, the Economic Policy Institute, and the National Committee to Preserve Social Security and Medicare.

At a news conference last month, the coalition outlined principles for a new Social Security supplement and invited others to submit proposals to be considered at a conference this fall.

In Retirement USA the “U” means “universal” coverage for everyone, the “S” means “secure” lifetime stream of income like a monthly check, and “A” means “adequate” standard of living.

Much like a government pension plan, the coalition principles say employers and employees should be required to contribute a specific percentage of pay. And the government should subsidize the contributions of low-income workers.

In pension lingo, government pensions are called “defined benefit” plans because of the guaranteed monthly check to retirees. A 401(k) is a “defined contribution” plan because the worker, and usually the employer, put money in the investment plan.

Critics of government pension plans say powerful unions have negotiated labor contracts with overly generous pension benefits, allowing retirement at age 50 or 55 with up to 90 percent of the final salary.

Among the rationales for big pensions are retaining employees by offering competitive benefits, often with other government agencies. In good economic times, earnings from pension fund investments can cover much of the increased cost.

The San Diego city retirement system, now saddled with a deficit of more than $2 billion, got into big trouble when officials reduced contributions and raised benefits, expecting investment earnings to cover the gap.

Public approval of generous pensions for police and firemen, whose jobs put their lives on the line, is said to have helped open the door for other government workers to get increased benefits.

Some individual government pensions can seem excessive. For example, Berkeley reportedly gave its city manager a raise to keep his salary above the pension income he would receive if he retired.

In the private sector, there has been a trend among large businesses to switch from pensions with guaranteed monthly payments to the 401(k) individual tax-sheltered investment plan.

The retirement plan becomes a predictable annual cost with no possibility of developing a crushing “unfunded liability” for pension payments in the future. Some old-line “legacy” corporations are hampered by massive pension debt.

Gov. Arnold Schwarzenegger backed a plan to switch new state and local government workers to 401(k) plans. But it was dropped from his ill-fated package of “Year of Reform” initiatives in 2005 in a dispute over death and disability benefits.

Former President George Bush, after his re-election in 2004, unsuccessfully proposed a Social Security change that would allow individuals to put part of their payroll tax into a 401(k)-style investment plan.

Critics have said, among other things, that many 401(k) plans have excessive managerial fees and that individuals tend to make poor investment choices. The once-trendy 401(k) has been taking more lumps since the market crash.

At a congressional hearing in February, Alicia Munnell of the Center for Retirement Research at Boston College said that when the 401(k) arrived in the early 1980s it was intended to be a supplement to employer plans and Social Security.

“My conclusion was that exclusive reliance on 401(k) plans was a catastrophe in the making,” said Munnell. “But I thought the dimensions of the problem would not become clear for another 10 or 15 years when large numbers of people retired reliant solely on Social Security and 401(k)s. Instead, the financial crisis has accelerated a re-examination of our retirement income system.”

A bulletin issued in December by the AARP, formerly the American Association of Retired Persons, gave an even-handed but critical appraisal of the 401(k) in the wake of the crash.

“Even when things are done right, there’s no guarantee of a reliable retirement income stream,” said the AARP article. “Because the plans are tied to the market, workers who have had the misfortune to retire during a downturn could outlive their savings—a signal failing of a retirement system.”

At a legislative hearing in Sacramento last month, the chairman of the state Senate retirement committee, Lou Correa, D-Santa Ana, talked briefly about the debate between “defined benefit” and “defined contribution” plans.

“Some time later with the committee I would like to have a hearing on this,” said Correa. “It’s a big issue.”

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at https://calpensions.com/ Posted 08 Apr 09

12 Responses to “The private sector, public employee pension gap”

  1. Bull Says:

    Quoting …..”Government retirement systems have to worry about rebuilding their pension funds without squeezing taxpayers ”

    Who are they kidding …… The TAXPAYERS are the endless suckers who PAY FOR the vast majority of the VERY VERY RICH Civil Servant pensions that they (the Private Sector) do NOT get.

    This structure is absurd. The endless soveling of money FROM the Private Sector Employee (via their TAXES) TO the Civil Servant must stop.

    Pensions for CURRENT (not just New) employees must be reduced to a level no greater than the average pension afforded to the Private Sector TAXPAYER.

    **********************

    It is wrong to tax people (Private Sector workers) who make market wages in order to subsidize people (Civil Servants) who, by virtue of their union clout, have been able to negotiate wages and benefits well above the prevailing market.

    Civil Servants are the energizer bunny’s of greed and the self-serving, vote-selling, contribution-soliciting, politicians are their enablers.

  2. nenebird Says:

    I think pensions are like health care. We shouldn’t allow Us companies to beggar their employees in retirement. Whatever the vehicle, 401 or a standard pension, you can provide for the future and still be globally competitive. Just cut some of the exec pay which has become so egregious in recent history.

    Its all a matter of priorities. People, human capital, have to become more of a priority for companies.

    One side effect of more competitive retirement benefits, will be less professionals going into the public sector. My hubby is a civil engineer. If the private sector would have been hiring and offered better benefits, he wouldn’t have gone public.

    Good discussion and top choice, as usual, Ed. Thanks!!!

  3. nenebird Says:

    I think pensions are like health care. We shouldn’t allow Us companies to beggar their employees in retirement. Whatever the vehicle, 401 or a standard pension, you can provide for the future and still be globally competitive. Just cut some of the exec pay which has become so egregious in recent history.

    Its all a matter of priorities. People, human capital, have to become more of a priority for companies.

    One side effect of more competitive retirement benefits, will be less professionals going into the public sector. My hubby is a civil engineer. If the private sector would have been hiring and offered better benefits, he wouldn’t have gone public.

    Good discussion and topic choice, as usual, Ed. Thanks!!!

  4. marcia Says:

    Properly designed, managed, and governed defined benefit plans offer the highest benefit for the lowest cost. But what we have in California, particularly for public safety workers, are overly generous retirement plans that encourage folks who hate their jobs to stay longer than they’d do otherwise, and encourage folks who love their jobs to quit (retire) sooner than they’d do otherwise. Current benefits don’t make sense.

  5. Jeff Says:

    A defined benefit plan doesn’t really exist without some ultimate guarantor. That can lead interested parties to enter into contractual arrangements or do things that obligate third parties, usually without their consent. Defined contribution plans get rid of this moral hazard of the ability to externalize costs onto others. It’s just that 401k’s or other individually owned plans are inefficient, lead to widely different investment results and concentrate market-timing risk. I’d like to see the pooling of retirement contributions into large pension funds for efficient management, sharing the risk of return variability by using some consistent application of the time value of money in order to determine a person’s fractional ownership of the pension fund’s portfolio value, out of which would be calculated their sustainable, annuitized pension, that didn’t either harm or help other participants in the pension program over time.

    And pensions contributions do need to be mandatory because poor old folks get taken care of by taxpayers so if you don’t save to provide for yourself, other people are forced to provide for you.

  6. Mr. Martin Says:

    Please don’t begrudge public sector employee’s their benefits. Compensation is a combination of pay and benefits. I do not hear any private sector employees championing raises in pay for public sector employees who are paid less and do not get bonuses. Every business or public agency balances pay and benefits with attrition and turn over. Job for Job, if the public sector was such a sweet deal their would be fierce competition. This is only an issue during economic downturns where these jobs seem more desireable for the time. The lackluster salaries do little to attract attention during economic booms where people who value direct pay over benefits are busy chasing their dreams. Some prefer benefits and security. Enough now.

  7. upthecreek Says:

    the more research i do on public pension systems… the more it makes me sick….

    when this thing blows … it is going to be UGLY.

  8. Mark Allen Says:

    Retirement itself is the culprit. The idea that we can stop working and still be paid is idiotic and an anachronism at best. At the beginning of the last century, average life span was 45. BY the time Social Security was imposed, life span was 55. Today it is approaching 75. Moreover, virtually ALL pension plans are unfunded. Social Security and Medicare are a basketball of liability moving through a garden hose of economic activity. It’s going to destroy the garden hose. Just as I have told my children that they are not “entitled” to anything in life, I don’t believe anyone is entitled to do nothing while I pay them for it. That’s going to be the real fight. We are all going to have to keep working until we are simply physically unable to do it. Then we can retire. Right now we are simply discussing ways to rearrange the deck chairs on the Titanic

  9. Bull Says:

    Quoting … “We are all going to have to keep working until we are simply physically unable to do it. Then we can retire. ”

    Yeah, if “WE” mean Private Sector workers. Virtually ALL Civil Servants will long since be retired and living on our TAX payments.

  10. Hanrod Says:

    This new suggestion for an expanded Federal retirement plan (like an expanded MediCare-type health care plan), is excellent, and long overdue.

    The private sector has failed its trust, and the Federal Pension Benefit Guarantee Fund has now had to pick up the pieces for many company plans, with benefits reduced for these unfortunate private sector employees, and yet at great and increasing taxpayer expense.

    Expanded MediCare and Social Security is the answer, funded by mandatory employer and employee contributions. Then, we will not really need separate public employee pension and medical plans at the state and local level, and private and public employee benefits will be equalized, to the extent that they may now be unequal, after more than 30 years of private sector corporate corruption, greed and squalor.

    Let’s get it on!

  11. muck Says:

    Dear God, not Social Security II. It would turn into just another wealth transfer system.

    Schools need to teach kids that when they get a job, 10-20% of all income must be saved. In addition, do not run up debt or else you will work until the day you die.

    Society cannot guarantee equal outcome when we have seven decades of individual choices to make. Make the right choices and you’ll be fine.

  12. Andy S. Says:

    Fast forward five years, with the markets having recovered and my 401k soaring, and all of this seems soooo silly. Anyone who is not doing well as 2014 draws to a close has nobody but themselves to blame. Either you are not saving, or you lost faith in the markets and made really bad investment decisions.

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