If Senator Hatch’s proposal were to become law, a local government that opted for insurance would hold competitive bidding once a year. The winning carrier would give each worker a contract, guaranteeing a retirement-to-death annuity amount for a year’s worth of work. Public employees’ unions would no longer negotiate the size of their members’ pensions; instead, they would negotiate how much the local employer would pay the insurer upfront. The annuity contracts would be portable, meaning workers would take theirs with them when they changed jobs.
Walsh then explains the thinking behind the plan:
That is what prompted finance committee staff members to think about insurance companies. They, too, provide lifelong income to their customers — they just don’t call it a pension; they call it an annuity. Annuities can be devised in any number of ways, including precisely duplicating the terms of a worker’s pension. Senator Hatch’s staff eventually decided that shifting the states’ pension business to insurers was the only way to continue providing the monthly checks that public retirees want without forcing local taxpayers to come up with more money every time the stock market plunges. Life insurers would bear the investment risk, shielding both retirees and taxpayers….Perhaps more important, state insurance regulators provide a kind of oversight unknown in the world of public pensions. They require insurance companies to meet capital requirements, taking into account the riskiness of their investments. Insurers are also required to hold more assets than they estimate they will need, and if they burn through their surpluses, state regulators can close them down.
On the surface, this looks like a smart idea. Two of the biggest problems with public pensions are politicians’s tendency to make long-term promises that will be difficult to keep, and the states’ consequent tendency to overstate the health of their plans while they head toward insolvency. Shifting the responsibility for management to private organizations could help alleviate both of these problems.Unlike state politicians, private companies have shareholders to answer to, and they’ll have a tough time justifying generous promises that will bring hefty payouts years down the line. This should make it more difficult for unions to push for plans the states (or insurers) can’t quite afford. Meanwhile, the tougher regulatory environment will give the public a more accurate picture of the overall health of these plans. Finally, and perhaps most importantly, the public will no longer be on the hook should these plans fall apart.The public worker unions will hate this; their business model is based on the ability to use concentrated political power to extort impressive but unrealistic pension promises from pandering politicians. Realistically, there is no way Democrats will let anything resembling this bill get through Congress, but it deserves a fair hearing. It would give workers flexibility as well as security and prevent one generation from pushing its obligations onto the next. It reduces risks for both employees and taxpayers. And it represents the kind of creative thinking that in time could put the American system on a sounder financial foundation.[Orrin Hatch photo courtesy of Wikimedia Commons]