The battle over public-sector unions is, at least in part, a battle over benefits: From Wisconsin to New Jersey, public-sector unions are among the last employees who can expect to retire with defined pension plans. Wisconsin, where a political showdown just resulted in reduced bargaining rights for public employees, is expected to release new estimates on state pensions next week, according to The New York Times. The state will likely ask employees to contribute more money to their plans and make other concessions.
But other states have an even more radical proposal: Get rid of pensions, which guarantee benefits, and replace them with 401(k)-type savings-and-investment plans. Earlier this week, Kansas lawmakers held a hearing on a bill to switch state employees hired after 2012 to a 401(k) system -- a move at least six states have already made and that Florida, Oklahoma, North Dakota, and Virginia are also considering. Kansas Republicans praised the bill, arguing that the state's pension system, currently facing a $7.7 billion shortfall, is unaffordable and that public workers don't deserve benefits unavailable to most private-sector employees.
The shortfall in Kansas' pension, like those in most states, was largely the result of the worst decade in the history of the stock market. As recently as the year 2000, the state's pension was 88 percent funded, a level that the Pew Center on the States, which tracks state pensions, considered adequate. The Center for Economic and Policy Research calculates that 85 percent of the pension shortfalls in states in the past decade were caused by this historically low economic performance. The rest of the hole in Kansas' fund opened up after state legislators decided not to increase contributions when benefits were raised in the early 1990s. Clearly, state pensions, Kansas' among them, are not unaffordable under normal economic conditions.
Furthermore, switching future employees to a 401(k)-type plan won't decrease the current pension shortfall by a dime, given that it only encompasses benefits promised to current and past employees.
But the real problem with getting rid of pensions isn't that it won't close state budget gaps. Most important, it would eviscerate retirement security for some of the few remaining workers who have any. Whereas pension plans -- in which contributions are pooled and invested in relatively safe, slow-growing funds -- come with the state guarantee that a retired worker will maintain a certain income, individual retirement-savings plans come with inflated Wall Street management fees and no protection from a sudden market downturn. They put workers' livelihood in the hands of financial managers who, if the financial collapse is any indication, too often make risky bets for short-term gain.
Why are 401(k)-type plans such a bad idea for public and private employees alike? First, they're expensive. The exorbitant fees charged by firms that manage 401(k) accounts can cost workers a quarter or more of their retirement savings. Over a lifetime, these fees can add up to more than $70,000 in losses for the average worker. Fees are levied on employers' matching contributions as well. If states switch to 401(k)-type plans, these costs will be shouldered by taxpayers.
401(k)s also place the burden of the multitude of risks that come with saving for retirement entirely on the backs of workers. Those forced into individual-retirement plans risk losing their savings in a market crash, investing so conservatively that they ensure themselves anemic returns, contributing too little to their plans, outliving their savings, and more. Public employees already earn less than they would if they worked in the private sector. It seems particularly unfair to ask those who are already sacrificing in order to serve the public to shoulder the entire burden of providing for retirement, as well.
The other argument Republicans make -- that public workers don't deserve benefits that aren't available to many in the private sector -- is ludicrous on its face. Why should the misfortune of private-sector workers driven into risky, inefficient 401(k)-type retirement savings plans be extended to public employees, just for the sake of parity? The point should be to improve retirement for all instead of competing in a race to the bottom. State pension benefits are by and large modest: The average benefit in Kansas, for example, was a meager $14,213 per year in 2006. Shouldn't we be fighting to ensure that everyone has the possibility of a secure, dignified retirement, rather than trying to bring down some of the last workers who do?
In the wake of the worst recession in living memory, states and localities are facing a host of real budgetary issues. But let's all recognize that states switching to 401k-type plans won't solve a single one of them.