☆ Pension reform often comes down to choice (1/4)
Thanks to pension liabilities, San Jose police and fire get one employee for almost the price of two. But while governments struggle to pay, many employees don’t even want the traditional "defined benefit" retirement plan. So says Reason Foundation’s Len Gilroy in Part 1 of an Opp Now exclusive Q&A. Reform doesn’t have to mean total privatization; but, he asks, why not offer employees a choice?
Opportunity Now: We’re looking for insight on how cities can cut costs without sacrificing services. What role can pension reform play in cost cutting?
Len Gilroy: Well, reviewing the reports of San Jose’s fire and police pension, you’re paying almost 80% of payroll right now to cover that pension benefit. One way to think of it is that for every person you hire, you have to make an additional 80% contribution. That’s basically another person you’re not able to hire.
When solvency declines, pensions can be a heavy burden, a big budget line item, and a big chunk of your budget going out the door.
ON: But wouldn’t cutting retirement reduce the quality of a city’s workforce? Isn’t retirement security essential for cities to stay competitive when they hire?
LG: In an urban police department in 2025, you’re not going to get the recruits you got 10 or 15 years ago. That’s not because of retirement. The generations entering the public workforce don’t care about retirement the same way they did decades ago.
ON: They don’t?
LG: People are actually more worried about "what’s my pay?," which California does a pretty good job on in terms of being competitive. But they also have to consider things like "am I willing to wear a body cam all day and be the guy who’s shown on Twitter…" when considering a law enforcement profession, and that is different than before.
ON: But you still have to offer some kind of retirement security.
LG: Right, you need to offer a retirement plan that’s sustainable from the workforce perspective, and you also can’t have some crappy benefits relative to competitors, especially in San Jose where you’re competing against the Apples of the world who are providing strong, competitive retirement benefits.
But, you know, most people in the private sector are not providing a traditional defined benefit pension. That doesn’t happen anymore. It’s extremely rare for all the same reasons why governments are in pain in that regard, which is the ease with which guaranteed benefits can be poorly funded and stewarded over the long haul. The private sector changed that a while ago.
ON: Your colleague at Reason Foundation, Zachary Christensen, wrote about creating a defined contribution option alongside the traditional defined benefit option, to help stay competitive by giving employees a choice.
LG: Right, the choice between a traditional, though preferably risk-managed, pension and a 401(k)-style defined contribution plan.
So, back in the 1990s, early 2000s, unfortunately this perspective took root that whenever there’s an underfunding problem, city leaders will often say, "We should cut the benefit." But you can’t really do that in most places legally, since it would modify a contractually vested benefit and violate constitutional protections. Pension protections for public workers—especially in California—go really deep.
Cities are constrained to making changes for people not hired yet. And the thing people latched on to was to do the exact opposite of a pension and go for a full-blown DC—defined contribution, 401(k)-style plan.
It’s like, if we can’t eat chocolate anymore, we must have vanilla. They’ve been stuck in a one-size-fits-all mindset forever. But there are many sustainable retirement design options, so what about hazelnut or cinnamon or strawberry? Or, what if we offer a choice between chocolate and vanilla, and set them both up to be decent options from the sustainability and adequacy perspectives, then let the people choose, right?
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