10/6/10

Changes Coming to Retirement Programs

In an election year when the costs of government are a big issue with fed-up voters, it’s no wonder that two key entitlement programs have surfaced to the top of both the gubernatorial contest and the First Congressional District race. The programs in question are public employee pensions and Social Security. The issues being debated about these programs revolve around their affordability and the thorny issue of possible privatization. Let’s examine them in turn, with an eye toward why reform is so necessary for the survival of each.

Public employee pensions here in RI and in many other states are becoming a major burden to taxpayers. Their costs are going to go through the roof in the years ahead, and few states or municipalities are putting enough new money into them to stay ahead of the commitments to future retirees that will be owed. In Providence, for example, the unfunded liability of the city’s public employee pension fund is over 70 percent in the red – that means the city can only pay out 30 percent of future claims unless the stock market can achieve a sustained surge (boosting the value of the invested fund) or taxes go way up, both of which are unlikely rescue developments. Many other cities and towns are in a similar sinking boat, as is the state itself.

Concessions to the unions granted by past administrations have proven to be too rich in the world we now live in. This was not unforeseen to anyone who examined any of these funds in terms of their assets and liabilities in more recent years, as former state Auditor General Ernest Almonte and RIPEC did on more than one occasion, sounding alarms that went largely unheeded. Our legislators at the state level have been unable to tackle pension reform in a manner that goes beyond occasional band-aids, hardly delaying the inevitable train wreck coming. Beyond bumping up the age of eligibility a bit and other window dressing tweaks, they have demonstrated an utter unwillingness to tackle the pension beast, which needs major overhaul. Even the staggering costs of guaranteed annual COLA increases, which are clearly unsustainable and completely out of whack with the private sector experience, remain untouched in absolute fear of union backlash.

Enter the pension issue into this election, with all the candidates for governor being forced to state their views on pension reform in some detail Thankfully, all agree that something must be done under their watch, regardless of who becomes the next chief executive of the state. Candidates Caprio, Chafee and Block all support moving to a hybrid pension system, one in which younger state employees would have the option to redirect some of their pension contributions into a 401(k) style fund. They disagree a bit on how far up the longevity ladder to go in terms of altering the existing pension fund arrangement and about annual increases, but they appear to be basically on the same page about doing something decisive.

Unfortunately, they will have minor influence on what actually happens because it’s the legislature that will ultimately shape pension reform. (If a governor’s position on an issue like this really mattered, we’d have pension reform already because Governor Carcieri advocated for major changes each and every year of his second term.) Whether the new legislature we elect to sit come January will rise to the occasion on pension reform is an open question – if we reelect the same Democratic Fox-Weed led team, you can surely count it out.

Talk of some privatization to Social Security has also come up in the race to succeed retiring Congressman Patrick Kennedy. Democratic candidate David Cicilline is wielding Social Security privatization like a club against Republican candidate John Loughlin, who entertains the idea in concept. Long considered the third rail of American politics – as in “don’t mess with it” – politicians as triumphant as George W. Bush, right after winning reelection and supposedly having “political capital” to spend, have instead crashed and burned when addressing Social Security reform. Admittedly, the Wall Street crash ushering in the Great Recession has, unfortunately, not provided reassurance in the “wisdom” of the market, at least over the short haul.

Again, the idea here is to allow younger Americans to redirect some of their promised Social Security earnings into the investments marketplace. No one is talking about taking away the Social Security benefits of retirees or even those of the Baby Boomers who will start collecting en masse in the next decade and potentially swamping the system. While there is room for differences in the debate about Social Security’s solvency and for how much longer, there should be no debate on the paramount need to get the fund on a more sustainable basis for the longer term. Like the debate over pension reform, some restructuring of Social Security will be needed, and the safest way to do that is to change the plan for those who won’t need it for some time to come. Otherwise public employee pensions and Social Security itself will be driven to bankruptcy.

6 comments:

  1. How would moving to a 401k type system eliminate the State's unfunded liability? The unfunded liability was created over several decades, and is NOT due to CURRENT employee benefits. Current STATE employees fully fund their own pensions - contributing close to 9% of their pay. The State contribution to CURRENT employees is less than 1% of pay. LESS than the typical employer contribution to a 401k plan. Don't believe it? You can see in the actuarial study done on the plan. It is called "normal cost". Therefore changing benefits for current employees would not address the unfunded liability built up over decades. The unfunded liability was caused by several reasons: previously over generous pensions, lack of funding, and mass retirement deals given to employees to get them to retire early in order to lower the employee count. And by the way, most current state employees would kill for Mr. Almonte's pension.

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  2. MR. Hazen White, you commentary is vapid at best, right wing propaganda at worst. The numbers do not support your positions.

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  3. Pretty obvious that any change to social security will take the form of increasing the "FICA cut off" -- currently around $106K, where high earners stop having to pay in. It's just too easy for congress to (eventually) increase that number just as they did years ago for medicare.

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  4. Maybe checking out Ken Block's Pension Calculator would help put this into perspective. And BTW, I don't work for Ken Block.
    http://kenblockforgovernor.com/pensioncalc.asp

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  5. Why don't you run genius? You're nothing but a sunshine patriot!

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  6. I wonder why leftwing lunatics that fail to see their party's destruction of our state litter this site with their cowardly barbs. I'm guessing that they're either on welfare rolls or work for the state they helped destroy.

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