Op-ed - Anti-business op-ed highlight urgency for pension reform
By J.R. Romano
Last week in CTNewsJunkie, Connecticut state employee and union steward Uri Allen blamed the decline of traditional pensions in the private sector on “corporate greed,” “middle-aged and older men,” and generally anything she perceives as pro-business and anti-labor. The reality of private pensions’ decay, however, is much less exciting than Ms. Allen suggests in her whimsical tale. Over the past half-century, private companies have tapered off defined benefit pensions because the plans carry large investment risks that threaten to sink them in millions of dollars in debt.
In the exciting world of retirement benefits, there are two basic types of savings plans that employers offer their employees – defined benefit pension plans and defined contribution savings plans. The former are the traditional pensions that your grandfather may have had. Employees make contributions to a collective retirement fund, the employer then invests the funds on various financial assets, and the individual employee is guaranteed a fixed income for life (typically 90% of their highest salary).
For decades, defined benefits were the norm in both the private and public sector. Workers liked it because it gave them peace of mind knowing exactly how much they would receive each month upon retirement – hence the phrase “defined benefit.” But as the decades progressed, companies and governments alike started amassing millions and even billions of dollars in unfunded liabilities. That’s because while retiree’s payouts are guaranteed, the investment returns are not. Even if the stocks, bonds, and property employers invest their employees’ savings in do not result in the desired returns, the employer is nonetheless legally required to cut them their monthly check.
To stay fiscally afloat, most private sector companies switched to defined contribution savings accounts. These are the 401(k)-type plans that most Americans in the private sector are very familiar with, where a worker has an individual retirement savings account and is responsible for making his or her own contributions and investments. State governments, on the other hand, have largely kept their defined benefit pension plans under legislative stagnation and union pressure.
As a result, states like Connecticut owe billions of dollars in unfunded public pension liabilities. Although the exact number is difficult to calculate, our state currently owes between $21 billion and $49 billion in unfunded liabilities according to respective estimates by the Pew Center on the States and State Budget Solutions. Note that both of these actuarial estimates are higher than Connecticut’s nominal state debt of $20 billion.
Ms. Allen claims such massive obligations are an economic stimulus, citing a National Institute on Retirement Security study that concludes “expenditures from state and municipal pension benefits supported more than 29,000 jobs and $4 billion in total economic output in Connecticut.” Unfortunately, this claim is a tired case of tax-and-spend Keynesian economics that is easily proven absurd. If government spending is always an economic gain, as Ms. Allen implies, why do we need a private sector at all? Why can’t the government simply cut every person a check each month to support their needs?
The answer, of course, is that such a scenario is impossible since government spending is funded through taxes. Thus, every dollar that the government spends is a dollar taken out of the private sector that could have been better used supporting a family or business, thereby distorting the market and discouraging growth. This economic reality is exactly why massive unfunded liabilities present such an existential economic threat, as can already be seen in cities like Detroit and states like Illinois.
Unless Connecticut restructures its public retirement system soon, thousands of government workers like Ms. Allen could lose the defined benefit pension plan she and her fellow civil servants depend on for retirement security. The most obvious solution is switching to a defined contribution plan that provides for millions of private sector workers retirement by allowing them freedom and autonomy over their savings. Michigan made such a switch in 1997 and has saved up to $4.3 billion of pension liabilities as a result according to the Mackinaw Center for Public Policy. If Connecticut’s elected officials ignore the ad hominem attacks slung by union activists like Ms. Allen and instead roll up their sleeves to enact pension reform, our ship of state can be saved from sinking.