Rich Danker: Let California voters enact pension reform
Ballot measures would change public-employee retirement plans.
By RICH DANKER / Project Director for Economics at American Principles Project, a Washington policy organization
As the public employee pension crisis has sounded alarms in California and around the rest of the country, reformers from various backgrounds have converged on a solution: switch from the defined-benefit to the defined-contribution model of funding.
In other words, let benefits equal contributions plus investment return, and offer no guarantee of how large that payout will be. This is the form most of the retirement compensation from the private sector and federal government took decades ago. It not only leaves the employer in better financial shape, it is appropriate for a younger generation of workers who don’t expect to be tied to one sector for their careers.
With that in mind, the group California Pension Reform is collecting signatures for two California ballot initiatives. The main feature of each measure is a shift toward the defined-contribution model of pension funding for future state employees. One measure enrolls new workers in this kind of plan while the other sets them up in a “hybrid” that retains a defined-benefit element.
Some states, like Michigan and Alaska, have made a clean switch, while Utah recently adopted the hybrid model. The Mackinac Center for Public Policy estimated that Michigan has avoided approximately $4 billion in unfunded liabilities by closing their defined-benefit pension plan to new state employees in 1997.
What’s kept more states from making the same transition? The erroneous assumptions used by reviewers such as the California Legislative Analyst’s Office. For instance, the recent LAO report for the two ballot measures asserts that California pension plans will face several billion dollars in extra costs each year for the next two or three decades because of the lower investment-return assumptions that the initiatives stipulate.
