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Pensions vs 401(k) plans for state workers

WillieBrown When Republican gubernatorial candidate Meg Whitman laid out her plan in April for salvaging California's public pension system, she blamed her Democratic opponent, Atty. Gen. Jerry Brown, for planting the seeds for the crisis when he was governor in the late 1970s. That's when Brown signed the Dills Act, which gave public employees the right to collective bargaining.

Brown outlined his own plan Thursday for reducing the cost of state-worker pensions, and there's much to recommend in it. Among other things, his plan would push the retirement age back to 60 from he current 55 for new hires (Whitman would move it back to 65) and would require employees to cover more of the cost of their pensions. Perhaps most important, he would revert to the old formula of basing pensions on a worker's average salary for his or her three final years on the job, not just the last year; bar pension benefits from being increased retroactively; and cap benefits for the highest paid workers.

But Brown stopped short of the one step I think would do the most to fix the pension problems caused by the Dills Act: Unlike Whitman, he wouldn't replace the pensions for new state employees with 401(k) plans.

Under the current system, public employee unions can (and do) use their political muscle to help elect candidates who are receptive to their contract demands. In essence, the unions are bargaining with the same people who rely on them for campaign cash and manpower. When budgets are tight, these officials can hold the line on wages but raise pensions, pushing the costs onto future budgets (and office-holders).

With a 401(k) system, however, there's less room for elected officials to boost benefits. Sure, they could increase the matching contributions the government makes to its workers' accounts. But there's no way to retroactively pad the benefits, and no risk that highly paid employees could collect whopping retirement packages, a la the top officials in Bell. Nor would reducing the retirement age have an effect on the amount taxpayers would be obliged to pay. 

That's because switching from defined-benefit (pension) plans to defined-contribution (401(k)) plans shifts risk from the employer to the employee. The latter could prove more valuable to employees, depending on how well they invested their retirement savings. There's no floor to benefits in a 401(k) approach, but no ceiling, either.

Some of my colleagues on the Times' editorial board disagree with me on this issue because, they contend, the pension state government provides helps make up for the below-market wages it pays. But I don't think public employers should be expected to offer a retirement benefit that private employers have largely abandoned.

-- Jon Healey

Photo: Former Assembly Speaker Willie Brown talks up pension reform on behalf of Gov. Arnold Schwarzenegger. Credit: Rich Pedroncelli / Associated Press

 

Comments () | Archives (18)

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Lamar Holst

It may be true that moving to 401ks would be better for the government's financial problems, but let's pause for a second and image the cataclysmic fight that will occur between Meg and the unions should she win. Jerry's plan is one that will help quite a bit and could be implemented without all of us having to endure massive strikes by the unions and gimmicks like Arnold's plan to pay state employees minimum wage until they give in.

Meg's UNofficial site:
http://megwhitman.biz

Paul Petillo

I am always amazed when folks like Mr. Healy espouse the "misery loves company" approach over "the i-wish-i-had-one" envy of those who have pensions. It's okay to feel angry about the state workers becoming the "haves" while the 401(k) owners are the new "have-nots". Most state taxpayers are, although they talk about the same reasons for "promises made", they are mostly avoiding the big picture or why pensions exist and perhaps why they should come back.

The argument often cited in promotion of the 401(k) is the ability to control your investments, which isn't really an argument so much as it is a business-centric DIY-cause-its-cheaper message. I'd be willing to wager that most people do not like the options inside their plans which makes eliminating pensions for 401(k) plans not an answer, but almost a punishment.

The deconstruction of pensions on the corporate level had the net effect of energizing an amazing bull market from 1982 to 2000, a period of time when workers were forced into these plans and was used as a selling point to get in the stock market now, retire early, retire rich. It was good for business.

And the shift to 401(k)s was also very good for those who participated in the plan, fully funded it and made sound diversified, low-cost investments. But too few did and when they did, too many took too many risks. Control by the employee, it turned out, was not what the average worker wanted - or could do with any success over a very long-term.

So those that lost money in their 401(k) are looking at pensions and wondering why they have a guaranteed income for life, that they can retire at 55, or 60, or 65, and most importantly, why they can't.

Pension plans participants do need to make concessions and there are very clever ways to do that so that all workers benefit. Perhaps a hybrid solution that allows for the plans to co-exist would be the easiest solution with the match based on the state's economic condition.

Unions might see the idea as the open door leading to the eventual elimination but that's is not the case. As way of example, one of the best 401(k) plans (as rated by Brightscope) belongs to an engineering local in New York - an offering of proof that it can be done without jeopardizing the pension. It can be done and successfully, leaving pensions, perhaps one of the great economic stabilizers ever invented.

Sheldon Watson

This is the first step to resolving the financial crisis in this state. You're brave to actually state in in writing. Brown caused this mess and the unions are lock step in line with the politicians. As we can see by our unemployment numbers now we can't afford this mess any longer. Just look at Bell, CA and you can see where this is getting out of hand. We'll now as tax payers pay a corrupt mayor close to $800k per year for finding out how to defraud a town. It's just a shame that they all can't be charged with RICO because that town council was obviously run as corrupt organization. This government is enslaving future generations with excessive liabilities that we can not fiscally handle.

Moving them to 401k plans makes the employees responsible for their future, not government. It's a step in the right direction finally!

Heyoehkah

Your colleagues should pay attention to the news. Recent studies have found wages paid in the public sector are markedly higher than the private sector.

There is no excuse for the abuse to taxpayers that public pensions represent. Certainly not the falsehood that public employees are underpaid.

ticktock1200

The reason that ALL workers, public and private, need pensions instead of 401k plans is that nobody knows when they are going to die. Some of us die before we retire and some live past 100. No working class person can save enough or invest wisely enough to live to 100. Pensions are like insurance, pooling money then redistributing it to those in need. It is true that the taxpayers should not have to bail out and continually prop up public employee pensions. Pension benefits can be reduced or employee contributions can go up, but, in the end, we must hold on to pensions. Otherwise, we are going to have legions of destitute old people who lived longer than they expected to and used up all of their 401k just to be fed and housed.

Nancy

Now not only is the pay superior for public employees, so is the healthcare and pension benefits. It may not be fair to the public employees to give that all up and receive something more in line with the private sector who are the taxpayers who fund their enormous benefits. As long as collective bargaining continues with the same folks who receive campaign money from the unions there is little hope of any change.

Of course, Jerry Brown, was the governor who signed into law collective bargaining with public employee unions. Unions have been having a lot of trouble gaining new members in the private sector but have exploded in the public sector. Could it be that in the private sector the employees have to actually produce something at a value that can be offered so as to stay in business?

The end of taxpayer money is closer than the unions think and people are beginning to revolt against such lopsided arangements. Highly unionized industries are drying up and even if GM has a new public offering in August it isn't going to insulate them from competition.

If the state of California offered a 401k pension plan for unionized public employees retroactively, to the 1970's, it would go a long way to rectifying this imbalance. But a retroactive implementation would be impossible to construct so the next best thing would be to freeze benefits at existing levels and offer a 401k from a date certain. It would take 15 - 25 years to bring down an average with the private sector but would help fiscal problems in the meantime...

AH

The American taxpayer has no obligation to ensure "a full safe retirement [pension] income during the retirement of Government employees"! Where is that line in the US Constitution?! Government employees work for taxpayers, not the other way around! All Government employees should move to 401(k) based pension plan (ok, maybe not the US President) like the private sector which makes up the majority of the US economy. Ironically, any organization that stays with a defined benefit plan makes an employee less likely to learn how to invest, and we know that the financial crises started because of mortgage borrowers not really knowing what they are getting into. So now we're going to create a new US Dept to over look after consumers regarding financial products, when the Govt itself is perpetuating the lack of financial education by maintaining pension plans. The Govt is always looking for ways to boost the economy, well, move all new employees to 401(k) plans and use those savings to cut taxes, it will push individuals to truly learn about saving for retirement and boost the private sector (releasing capital that can be directed to new investments, for more jobs). But no, as of right now everyone seems to be waiting for the next crises, almost go bankrupt, before anything is done....

DeAnna Rice

my husband worked all his life and PAID HALF of his retirement pension. While you and your loved ones where enjoying the newest cars that come into the port or the newest gadget, or fashion? My husband was working for LOWER wages than someone doesn't work for a municipality.

so you could have your creature comforts. A deal was made above board and you feel cos money has been misspent by POLITICIANS that retirees and the poor are supposed to pay for it.

Excuse me but when in America did deciding not to pay the bill of a contract you signed become okey?

It sure the hell hasn't been that way for small business owners and people who are losing their homes.

Jon Healey

Note to readers: I moved a question that "quatidion" posed on this blog entry about LA Times writers and Journolist to the relevant post, Chummy Journolists. To see it, go here: http://opinion.latimes.com/opinionla/2010/07/the-fuzzy-lines-dividing-journolists.html

sh

Gov. Wilson negotiated a two-tiered plan, such as proposed by Jerry Brown, in his last year of office. However, when Grey Davis took over, he abandoned this plan, at the union's bequest. Had CA adopted this plan, the fiscal implications for today's budget would have been considerable. Would Jerry Brown be able to keep his proposed plan without bending to union demands? Look what is happening in Sacramento now. Perez is refusing to discuss the budget. Smart negotiating strategy, so the governor's plans are on hold. Perhaps he is waiting for a Democratic governor while the state's credit rating tanks.

Julian Camacho

Great comment! For all the complaining about welfare recipients, government workers from teachers, college professors, judges to secretaries steal the phrase. Retirees live like kings and what better example can there be with this than the city manager former or current than Robert Rizzo. A $610,000 pension until he dies. This is legalized theft of public money. Should a UC professor earn $90,000 plus to teach two classes and work twice a week? For what, knowledge of poem or a made up theory.

I'm glad I am unemployed and not paying states taxes, for what so that my former employee at Cal State Long Beach can live comfortably while they work and prepare to retire.

Lastly, no wonder most CSU professors are White, this is their country club at the expense of taxpayers.

Richard Rider

The objections of the other TIMES editors to Jon Healey's 401k plan suggestion is based on a often-repeated canard -- that public sector workers are paid less than private sector workers doing the same work. It may have been true 30-40 years ago, but not so in the last 20 years.

A few years ago (2004?) the LA City Comptroller (or Treasurer) did just such a comparison of common LA city jobs also found in the private sector in the area. It turns out that the city SALARIES were 20%-30% higher than the average for the identical jobs in the LA area. Indeed, the study UNDERSTATED the disparity because it included all other government agencies' salaries in the total mix -- it should have compared with JUST the private sector salaries.

Richard Rider

I went back and dug up a column I wrote on the LA city salary study. Seems doing it by memory resulted in several errors -- all of which UNDERSTATED the superiority of city salaries vs. the other salaries in the region for the same jobs. Here's an excerpt from my column, complete with a link to the study:

Here's a definitive study of salaries by its City Controller. An appointee of the Democrat-dominated city politicians, this bureaucrat doubtless is very sympathetic to government workers. The full 2006 study, which involves a number of recommendations for improving the labor negotiation process of L.A., includes some salary comparisons of common jobs done by both city employees and private sector workers.

The full report (an 87 page PDF file) can be read and downloaded at
http://tinyurl.com/2wbkmm. For our purposes, the salient section is page 40 through 43. The city study compares the city wages with the private sector for six common occupations.

Actually the "private sector" job salaries (gleaned from the California Employment Development Dept) are overstated, as they include government jobs in the L.A. region as well! Hence the disparity is even greater than the study indicates.

And let me repeat: these are only the salaries -- it does not include the opulent government benefits, nor does it take into consideration the rock-solid government job security.

Here are the 2005 results:


L.A. City L.A. Region % Higher

Bookkeeper/
Accounting Clerks $44,882 $33,740 33.0%

HVAC Mechanics $61,171 $42,896 42.6%

Security Officers $39,119 $22,736 72.1%

Executive Secretaries $57,107 $42,568 34.2%

Clerks $33,972 $24,416 39.1%

Construction/
maintenance laborers $38,701 $30,781 25.7%


In this study, the average public employee position receives over 41% higher pay than private sector counterparts. Not exactly chump change.

SeeSaw

CalPERS rules forbid forcing new hires into DC plans if the entity in question is already a CalPERS member.

The DB plan of CalPERS has worked well for pensioners for the last 78 years. We are not going to let you change it to a DC plan.

AH

In regards to SeeSaw's comment "The DB plan of CalPERS has worked well for pensioners for the last 78 years. We are not going to let you change it to a DC plan" --> if the private sector stayed with DB, majority of US Corps would have gone bankrupt and foreign companies would dominate (e.g. US Auto industry), you want our private sector to shrink? Promises cannot be broken, but for new government employees then need to move to DC plans, or are we going to wait until private sector taxpayers (majority of America) start rioting?! I'm also tired of government employees stating that they earn less thus should get a DB plan, well, if you're sick of earning less then do something about it, or else just accept with what you have and stop complaining!

Terry Devon

Second, let's kill all the union plans!

Terry Devon

Second, lets abolish all unions for government workers.

James Morgan - Puritan Financial Advisor

In essence, the unions are bargaining with the same people who rely on them for campaign cash and manpower.


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