This month, we wrote about The Truth About Cost Sharing and Pew Charitable Trusts using pension plans in Tennessee, South Dakota, and Wisconsin as examples of cost-sharing policy. We went on to debunk the assertion that cost-sharing policies are the way forward by arguing that pension systems shouldn’t take a one-size-fits-all approach to pension policies. Unfortunately, in a recent post by The Tax Foundation, they are echoing the same flawed arguments.
Time and time again, we have seen groups neglect to see the writing on the wall: closing pension plans creates fiscal nightmares for states, hurts recruitment and retention efforts, and the alternatives do not provide a secure and dignified retirement to public employees.
The National Institute on Retirement Security (NIRS) has done some great work countering these arguments with the facts. In their most recent report, Enduring Challenges: Examining the Experiences of States that Closed Pension Plans, NIRS confirms what we’ve been saying all along. Their research examines four states: Alaska, Kentucky, Michigan, and West Virginia. All of these states closed their pension plans to new employees and moved them to less reliable 401(k) plans or hybrid plans. Each of them has faced its own set of unique challenges, including increasing unfunded liabilities, which can put a strain on a states’ budget. One state of note is Michigan, where in 1997 lawmakers closed the plan to newly-hired public employees even though SERS’ funding status was 109 percent – at the time, one of the best-funded pension plans in the country. At the end of 2017, the plan’s unfunded liabilities have increased to 66.5 percent. Although the state has increased funding for the plan in the last decade, NIRS’s report states: “The balance between active and retired members has shifted dramatically in the two decades since the plan has been closed. In 1997 there were 55,434 active members and 36,123 retirees and beneficiaries, or 1.5 active workers for each retiree. By 2018, there were 9,473 active members compared to 60,010 retirees and beneficiaries.”
In May, we wrote about the Town of Branford, Connecticut. In 2011, Branford moved all of their newly-hired police officers from a pension into a 401(k)-style retirement plan. After years of struggling to recruit and retain officers, the Representative Town Meeting re-opened their pension plan. Additionally, we’ve written about Palm Beach, Florida where in 2012, the town decided to close all of their public pension plans. During the next four years, Palm Beach experienced a major exodus of public safety officers who were training with Palm Beach and then taking jobs with other jurisdictions that offered a pension. The town ended up spending $20,000,000 in training costs before they finally decided to open back up their pension plans for police officers and firefighters in 2016.
Lastly, alternative retirement plans do not offer a secure retirement as pensions do. In a joint research project by NIRS and the UC Berkeley Labor Center, they found that moving teachers into a 401(k) retirement plan from a pension would “sharply reduce the retirement income security of teachers.” Since most public employees stay in their jobs (which tend to be lower-paying than the private sector) for their entire careers, they are unable to save enough to retire with if they solely rely on a 401(k)-style plan.
Many times we see anti-pension idealogues operate in an echo chamber. Don’t let these groups fool you. Moving new employees to an alternative retirement plan will not save your state or municipality money. In fact, it will cost more, hurt your recruitment and retention, and hurt hard-working public employees.