Pension Pain

Cross Posted at Capitol Domes

The stock market’s steep decline is a source of angst for all those whose retirement account balances have taken a nosedive.

The financial discomfort of private-sector workers is compounded by their having to bolster the pension funds (SERS and PSERS) from which retirement benefits are paid to state and public-school employees.

Whereas most private-sector employees are enrolled in a “defined contribution” (DC) pension plan — the retirement benefit of which rises and falls with the stock market — government employees participate in “defined benefit” (DB) plans that guarantee a formulaic retirement benefit based on years of employment and average salary.

The retirement benefits of state employees’ DB plans are not affected by the Dow Jones. They are funded with employee and taxpayer contributions, which are invested in the stock market. But if the SERS and PSERS portfolios underperform, more tax revenue is simply collected to straighten out the balance sheet.

The SERS and PSERS funds are facing losses of 30-40 percent for the calendar year. In order for these funds to have enough money to pay out the promised retirement benefits for state workers, taxpayers will have to chip in a good bit more.

Well before the recent slide in the Dow, the Commonwealth Foundation reported on the forecasted financial problems for SERS and PSERS.

Rep. Scott Boyd has introduced legislation that would place new state hires into DC plans. It wouldn’t impact current DB plan enrollees and beneficiaries, but it would make future taxpayer contributions to SERS and PSERS more affordable and predictable.

Moreover, DC plans provide a long-term retirement benefit comparable to DB plans — even with market fluctuations — while not being subject to the politics inherent in the current DB plan paradigm (i.e., state unions and retiree associations constantly lobbying for a higher multiplier in the formula).

It is time state government follow the cue of the private sector and transition from DB retirement plans to DC plans.