Even though government-employee pension plans nationwide are billions if not trillions of dollars underfunded, the union officials and government employees who run those funds want to create public pensions for private-sector workers.
Amid a political environment where pensions for government employees are losing favor, the National Conference on Public Employee Retirement Systems created Secure Choice Pension as a model state-run plan for residents who don’t work for state or local governments.
Estimates of unfunded state pension liabilities range from $730 billion to $4.4 trillion, according to an April 2012 report by the Mossavar-Rahmani Center for Business and Government
at Harvard’s Kennedy School.
These dire projections have led to the implementation of high-profile pension reforms from Rhode Island to Wisconsin.
New York City Comptroller John Liu, speaking at the NCPERS conference earlier this month, criticized the politicians reining in benefits for capitalizing on “pension envy.”
Instead NCPERS wants to expand pensions to increase political support for them.
“The traditional pension, which guarantees a small and steady income no matter how long a person lives, is a cost-effective and extremely efficient way of providing retirement security,” Liu said. “We need to extend that same protection to everyone.”
“The public sector’s traditional pension is crucially important. It serves as a bulwark against the growing retirement crisis we face in this country,” he said.
“What it defines as a benefit is a rate of return on the contributions into the plan,” said Cathie Eitelberg, a senior vice president for actuarial firm Segal.
She said the model program developed by NCPERS with her company’s advice would guarantee a 3 percent annual return to participants.
Employees and employers would each contribute 3 percent of pay.
“We think that over time it would be a higher percentage return,” she said.
Eitelberg said returns above the guaranteed 3 percent rate would be placed into a reserve fund that could be used to make up future gaps in funding, make one-time cost-of-living payments to retirees or increase the rate of return on contributions.
She said the enabling state has the option of customizing the “very vanilla” design of the Secure Choice model.
“You have an infrastructure that’s already in place,” she said of existing government pension plans. “They run relatively lean as far as operating costs.”
“We don’t expect to comingle. We would co-invest,” she said.
Eitelberg said public plans could even loan start-up funds to the new funds. Alternatively, she said, the state or a foundation could provide a grant to get the program started.
She said private companies could offer a Secure Choice plan, but they haven’t yet.
“Maybe the public sector is going to lead the way,” she said. “I think that people haven’t thought this way.”
In his NCPERS speech, Liu objected to the trend of adopting private-sector retirement models in the public sector, saying the private sector should adopt public-sector models instead.
“I believe that the better public policy question is: why shift public workers to a plan that creates so much uncertainty? Should we really be mimicking retirement programs and approaches now being used by the private sector?” Liu said. “Shouldn’t the private sector be providing better retirement security for its workers?”
According to Eitelberg, states will not be exposing taxpayers to new risks. She said in the worst-case scenario there would only be a reduction in benefits. She said tests approximating market conditions over the past decade, including two recessions, allowed for “relatively stable” contributions.
Eitelberg said Secure Choice is “a natural progression” from industry-based, multi-employer plans. She said the plan will allow states to deliver defined-benefit plans in the same way defined-contribution plans are often delivered.
Despite such assurances, some may question if states – or unions – are in a place to be supporting expansion of pensions given the extent of existing liabilities.
Multi-employer pension plans are facing their own challenges. Credit Suisse recently issued a report contending that 1,354 union-run pension plans are underfunded by $369 billion. The report’s finding that the grocer Safeway has $6.9 billion in pension liabilities – 76 percent of the company’s market value – led Credit Suisse to downgrade its stock.
Federal law remains a stumbling block for the proposal. Congress would need to amend the Employee Retirement Income Security Act, ERISA, to allow states to set up Secure Choice plans.
In particular, Eitelberg said, ERISA does not allow employees to make tax-deferred contributions to their pensions. She said Congress would also need to revise non-discrimination rules that prevent companies from offering plans only to certain classes of employees.
Eitelberg said Secure Choice is a policy issue for states because some residents have done nothing other than pay into Social Security. She said offering pensions will allow retirees to continue to pay taxes and volunteer their time.
According to an NCPERS whitepaper on Secure Choice written by its executive director, Hank Kim, a 25-year-old member of the model plan who retires at 65 will be able to replace 29 percent of pre-retirement income, assuming a 5 percent rate of return.
At the 3 percent guaranteed rate of return, the same 25-year-old member would replace 19 percent of income. Social Security would replace about 30 percent of pre-retirement income for the same 25-year-old.
According to Kim, individuals need to replace about 80 percent of pre-retirement income to maintain their standard of living.
According to the proposal, Secure Choice would be a cash-balance plan backstopped by reinsurance bought on the open market.
Eitelberg said investments would be split equally between fixed-income and equity, an investment strategy different from public plan strategies.
“A state government generally has infinity for a time horizon,” Eitelberg said. “A state government is not going away.”
The Secure Choice model includes provisions for employers that leave the program or go out of business.