Opinion: Converting to “defined contribution” pension plans much more cost-effective
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Howard Jarvis Taxpayers Association's president Jon Coupal explains how California's unfunded pension liabilities, at nearly $250 billion (for SJ specifically: $3.6 billion), strain taxpayers, who must shoulder the price of overgenerous commitments. By switching from defined benefit to defined contribution plans, the State could reduce taxpayers' risks while maximizing retirees' returns. From the OC Register.
But a long term financial problem that California needs to prioritize is our level of pension debt. Unlike other fiscal problems, which can change from year to year, the level of unfunded pension liabilities is a problem that won’t disappear overnight.
Taxpayers hear a lot about how generous California’s pension benefits are, notwithstanding some minor reforms under former Governor Jerry Brown, but the public’s understanding of public sector pension benefits remains elusive because the subject is so complex. The first thing to understand is that California’s major pension funds, both CalSTRS (teachers) and CalPERS (public employees), are defined benefit plans, which guarantee specific payouts to retirees and thus leave taxpayers at risk if promised benefits exceed available funds.
The best solution to reduce risk would be for California to do what other states have done by transitioning to “defined contribution” plans. This would not only reduce the risks to the state and taxpayers, but could also produce better returns for the employees. In defined contribution plans, the employee’s benefit is equal to his or her own contributions, plus those of the employer (in this case, the taxpayers), plus whatever earnings the investments accrue. Regrettably for taxpayers, the political clout of public sector labor organizations makes a significant transition to defined contribution plans virtually impossible.
It should surprise no one that California has the most pension debt – by far – compared to all other states, at nearly $250 billion. No other state even comes close.
This article originally appeared in the Orange County Register. Read the whole thing here.
Related:
Perspective: Domino effect of SJ's union deal could disturb pension plan
Data says: Don't ignore how public unions slyly boost benefits
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