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Pensions vs 401(k) plans for state workers

July 23, 2010 |  2:32 pm

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

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