When the Legislature reconvenes next month, one of the front-and-center issues will be public pension restructuring. California’s public employee unions intend to be vigorous participants in this effort. It is important to note, though, that unions have long been active in negotiating changes at both the state and local levels that have reduced public costs while continuing to ensure decent retirements for public workers.
These changes include increasing employee contributions and reducing pension formulas, which have already eased state budget costs by $600 million over the last two years. Similar changes are being negotiated in more than 200 California cities, counties and local districts, where public employees have agreed to pay more into pension plans, reduce benefits and lower costs.
Meanwhile, the sky is not falling, even though public pension foes have been issuing Chicken Little warnings about the collapse of the treasury if large and immediate cuts are not made to the entire pension system. Public employee pension contributions take up just 3% of the state budget. That’s less than the 3.8% of state and local budgets contributed to public pensions nationwide, according to the Center on Budget and Policy Priorities.
Gov. Jerry Brown has laid out a 12-point redesign plan that is a good starting point for the debate and that would bring significant changes. Some changes we see as beneficial, including curbing the practice of pension spiking, which balloons salaries for soon-to-retire workers to puff up their pensions based on those salaries; and double dipping, which is when a worker collects a state pension while working at a new public sector job. Others, such as the proposed shift to a less financially secure hybrid pension structure and the call for a substantial increase in full retirement age, are more worrisome.
The shift to a hybrid plan — combining a smaller secure, defined-benefit plan with an insecure 401(k)-type plan — would put employee retirement savings at significant risk. The 401(k)-type plans have higher administrative costs than traditional plans, according to Benefits and Compensation Digest. They would bring potentially lower returns and, during economic downturns, could deprive the state economy of steady revenue from retirees who have dependable pension income.
A study for the Brookings Institution found, for instance, that traditional plans, such as the ones public employees now have, outperform 401(k)-type plans by 0.8% a year. Over 30 years this is a 25% difference in total return. That’s a hefty margin and could well mean the difference between a reasonably secure retirement and a life on the edge, likely dependent on public assistance to survive.
Everyone with a 401(k)-type investment has experienced the volatility of the stock market in recent years. Pension funds such as CalPERS are run by experts and invest over the long term. They can weather these drops by averaging gains and losses over time. But if the market hits a bad patch at the time a worker plans to retire, there is no time under a 401(k) plan for that worker’s savings to recover.
Moreover, CalPERS reports that state-level defined-benefit pensions — with their steady flow into the economy — generate $26 billion in economic activity yearly, a secure investment in our economy, particularly in these troubled times. If that money were coming instead from the returns of 401(k) investments, its earnings and the economic activity they generate would fall with the market.
Raising the retirement age is equally unwise. Studies show that increasing the retirement age disproportionately harms low-wage workers and people of color. Forcing workers to either work longer or retire early on reduced pensions can lead to more people using taxpayer-funded social services. Retirement age should not be one-size-fits-all. It should be negotiable and depend on the rigors and needs of the job.
The public depends on the physical ability of police, firefighters and other first responders to do their jobs. So safety retirement plans let them retire early, before that vigor declines. But the efforts of all public workers contribute to the public well-being, and those workers also should be able to retire on a decent pension when age makes them unable to continue to do their jobs effectively.
Public employees have bargained in good faith to achieve the changes that are already improving the state’s pension picture. We are ready and willing to discuss other proposals that will continue to boost the stability and affordability of public pension funds.
The public has a right to be indignant about six-figure public pensions, though they go to just 2% of retired public workers, mostly high-level administrators. But the rising retirement crisis in America stems not from mostly modest public workers’ pensions, which for state workers average just $25,000 a year, but from the alarming deterioration of private sector pensions.
With a new UC Berkeley study showing that half of Californians will retire at or near poverty levels, it is crucial that we work together for retirement security for everyone — in the public and private sector alike.
Dave Low is chairman of Californians for Retirement Security, a coalition of more than 1.5 million Californians representing public employees and retirees.