RALEIGH – One problem with state government running an old-school defined-benefit pension plan for its employees is that it yields bizarre, infuriating anecdotes about problematic workers or double-dippers drawing big checks. The Raleigh News & Observer’s Dan Kane just related some of these in the Sunday paper.
But that’s not the main reason why North Carolina and other defined-benefit states ought to begin the transition to a defined-contribution system for retirement savings, as is now more typical in the private sector. Committing taxpayers to paying a set amount or percentage of income into a savings account at the front end, rather than committing taxpayers to pay for benefits at the back end, makes far more sense given the realities of public budgeting.
Any plan for investing dollars today to produce income tomorrow embodies some risk. You can’t eliminate risk from human life, despite the protestations of politicians and late-night infomercial salesman (but I repeat myself).
Of course, proper diversification and a willingness to delay gratification for future reward can markedly reduce the risk of outliving one’s retirement savings. But there will always remain some uncertainty in the course of a dynamic private economy – from which all present or future income ultimately flows – which is why financial instruments exist, to convert unfathomable uncertainties into real but measurable risks.
With traditional pension systems, it looks like employees are allowed to transfer their risk of loss to the taxpayers, who are on the hook to pay claims if the pension plan’s investments don’t pan out. The vast majority of state pension payouts are funded by investment gains, not the principal of tax dollars put in. But if something ever went horribly wrong, taxpayers are legally responsible for making up the difference.
Here’s the thing, though: in reality, state employees don’t really transfer all this risk to their fellow taxpayers in traditional pensions. While North Carolina’s pension plan isn’t bad off (yet), most state plans are significantly underfunded. State politicians usually don’t consider it a high priority in good economic times to keep up with their pension contributions. When the economy goes south, so do investment returns – and it becomes more difficult to transfer tax money from immediate public safety or education expenses to shore up pension plans.
As states struggle with tens of billions of dollars in unfunded pension liabilities, you can be sure that state workers won’t be spared the resulting pain. They’ll lose immediate income, and perhaps even their jobs. They’ll also pay more to the state as taxpayers. Some of their retirement benefits will be trimmed, to the extent allowed by law.
In North Carolina, our big problem isn’t so much unfunded pension liability as it is unfunded health-plan liability. North Carolina politicians have promised teachers and state employees about $30 billion in retiree health benefits for which there are no tax dollars or investment gains put aside. Anyone who thinks this gaping hole is going to be filled in ways that won’t adversely affect North Carolina’s government workers and retirees is living in fantasyland.
Governments simply aren’t good at managing long-term liabilities. At the federal level, unfunded liabilities for Social Security, Medicare, Medicaid, and federal retirees are now approaching $100 trillion. At the state and local levels, pensions and health plans are extremely shaky. Rather than always waiting until “next year,” or planting the fiscal equivalent of magic beans in the backyard hoping they’ll sprout a giant beanstalk to pots of gold in the clouds, policymakers need to make some tough decisions now.
One such decision is to bring clarity and predictability to retirement planning by starting the transition to defined contributions. Every year, taxpayers should fund certain deposits into state workers’ retirement accounts and health savings accounts, while maintaining the state’s traditional pension system for employees close to retirement and reforming the state’s health plan to reduce its costs.
Real-time commitments of taxpayer resources are more enforceable and comprehensible than making big promises in the distant future.
Yes, the current pension system yields a few state retirees of questionable merit with eye-popping payouts. We’d be lucky if that was the only problem.
Hood is president of the John Locke Foundation.