The American Interest
Analysis by Walter Russell Mead & Staff
A New Solution to the Pension Crisis

One of the biggest fiscal crises facing state and federal government is rising and unsustainable pension costs, as we’ve often had occasion to notice. As more states look at ways to deal with the problem one approach keeps popping up on the radar screen. In Pennsylvania as well as in Kansas, politicians are facing the obvious: the defined contribution pension method is the best way to secure individual pension rights and to keep state budgets on track.

With pension payments set to consume increasing portions of the state budget, Mr. Corbett, a Republican, has made a priority of overhauling the state and public school employee retirement systems. His budget office recently released a report saying the governor plans to address pensions in his February budget speech.

In the meantime, a group of senators including President Pro Tem Joe Scarnati, R-Jefferson, and Majority Leader Dominic Pileggi, R-Delaware, are reintroducing a bill to divert new hires from the underfunded defined benefit plans, the State Employees’ Retirement System and the Public School Employees’ Retirement System, to a new defined contribution system.

“The basic idea is to bring public sector pensions in line with private sector pensions,” Mr. Pileggi said.

The proposal calls for the state to match employee contributions of up to 6 percent of applicable earnings.

This proposal is a step in the right direction for state and local governments strapped by pension costs. Enrolling state employees in plans like those now widely used in the private sector where the state matches employee contributions, will prevent politicians from making pension promises they can’t keep, eliminate a whole series of abuses and protect the pension rights of employees who want to change jobs.

It’s important to see the shift as more than a cost saving method, and it’s also important that governments not use this shift as a way to walk away from their responsibilities as employers to help employees build a secure retirement. State and local governments should make it difficult, but not impossible, for employees to opt out of the system, thereby balancing employee freedom with the vested interest the state has in citizens’ making adequate provisions for their retirement. The state should also put in place safeguards for local income employees. One possibility would be for governments to match contributions at a higher rate for those who earn less.

The defined contribution system makes so much more sense for state and local governments that it will continue to spread. Those advocating this reform need to make sure that the systems they propose address the needs of those who need the most help.

The 401k approach to government pensions is one of the many adjustments that we will have to make as the country moves beyond the blue model. But if we get this overall policy right, investments Americans make through 401k  plans and other saving mechanisms will do well as the economy returns to a healthy long term growth path. A revamped pension and savings system is not about sharing pain of failure; it’s about opening the door to a new age of abundance.

 

Published on December 25, 2012 12:13 pm