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Friday, October 12, 2012

The future is the past

The comparison between  defined benefit pensions and defined contribution pensions is often portrayed as a moral choice.  Defenders of defined benefit pensions believe that they are an obligation that caring employers owe to their employees, while the defined contribution pensions are viewed as a cold-hearted abandonment of employees to their own retirement fate.  This good vs. evil model sets up those who advocate for defined contribution pensions as the bad guys.

This simplistic model is complicated by financial reality.  The principal justification for the defined contribution pension is that it allows the employer a way to predict costs.  By paying a known cost based on wages and salaries, the employer knows that there will be no future surprises that could affect their ability to operate.  In the private sector, this also benefits employees of a company that later liquidates by keeping their retirement funds in the control of the employee.  The public sector has an decided advantage over the private sector because public sector entities, though they can and do go bankrupt, will never cease to exist or lose the ability to bring in revenue.

However, the public sector still has to budget and predict future costs, and the inability to do this is what caused the public sector pension crisis.  At the time most public sector pensions were established the honest belief was that defined benefit pensions could be managed and funded in perpetuity, but unfortunately, political and financial reality intruded.  Now public employees will go into the future with uncertainty about their retirement benefits hanging over their heads.

This leaves the good vs. evil model a tired argument, but it is still being sold to citizens and public employees.  The real test is if a defined contribution pension can allow governments to plan for costs (and avoid bankruptcy) and provide a fair and adequate retirement for their employees.  The following articles show that it can be done:
(How three Contra Costa cities avoided the doomsday of pension plans)
(Social Security by Choice: The Experience of Three Texas Counties)
It is amazing that the three California cities were able to resist the siren song of CalPERS and public employee unions when they were peddling financial snake oil.  The city officials who resisted these appeals had an unusual grasp of finance and a rare concern for their citizens and workers.  The Texas counties are similarly remarkable for rescuing their employees from the losing proposition of Social Security.  These long-retired officials in California and Texas are exemplars, not only for their ability to design retirement plans that were mutually beneficial to taxpayers and employees, but also for their sober and realistic attitude about future costs and benefits.  Regardless of what eventually happens to public sector employee pensions, this same attitude should be the standard mindset going forward.

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