These days you can’t turn around without hearing the phrase ‘pension reform’ and the great horrors pension systems and retirees are unleashing on society. Everyone has an opinion and some are quite rabid about it. The soundbites, inflammatory and many times downright false statements would be laughable – if these were not real peoples’ lives we were talking about. We hear time and again that ‘defined benefit plans don’t work’ and there must be massive pension reform to solve this catastrophic crisis, right? Wrong.
So here’s the truth. Pension systems, when designed properly (like LAGERS) are an effective strategic tool used by employers to make communities better, safer and more efficient. Defined benefit plans are designed to attract skilled, quality workers and give them incentive to dedicate their service and skills to improve their communities. Then after a career of work, when the employee can no longer function at maximum level, a pension provides a mechanism for exiting the workforce with dignity and security through modest, protected monthly benefits. This workforce movement also provides incentive for younger workers to follow that same path. Defined benefit plans create loyalty and partnerships between employees, employers and communities.
Some of the pension reform discussion has focused on eliminating defined benefit pensions altogether and transitioning public workers into 401(k)-type defined contribution plans. While it is always good to look into ways to be more efficient and improve the financial condition of pension systems, switching government workers from a defined benefit pension plan to a defined contribution plan will ultimately hurt the retirement security of workers and be more costly to governments.
In fact, a study from the National Institute on Retirement Security found that converting from defined benefit to defined contribution plans actually increased costs and pension under funding. Case Studies of State Pension Plans that Switched to Defined Contribution Plans summarizes the impact of switching from a defined benefit pension to a defined contribution in three states – Alaska, Michigan, and West Virginia.
One state, West Virginia, who moved to a defined contribution plan in 1991 actually switched back to a defined benefit plan 14 years later. After studying the costs of going back to a defined benefit plan in 2003, the state found that the normal cost (the cost of benefits accrued in a single year) for its defined benefit retirement system was nearly half of the required employer contribution to the defined contribution plan. This is why the state decided in 2005 to put all new hires into a defined benefit plan.
Even more, in the last 5 years 70 employers have joined LAGERS and we found some interesting news: two out of three employers were switching from some type of DC/investment type plan into the LAGERS defined benefit structure. Why? Because LAGERS works well, for everyone.
And there’s more! Do you want to know the ‘secret sauce’ to making a pension plan work? Requiring contributions be made. As simple as it sounds, that’s why LAGERS works so well. As a system we are 670 employers strong, all of which make their required contributions each and every month to ensure the earned benefits are prefunded. To date the system as a whole is 94.4% prefunded, even including the employers recently joining – who have not yet had a chance to fully fund all of their benefits. Our system ensures benefits will be funded, and secure.
If you want to join the debate, I urge you to take a close look at the state of worker pensions and security – or insecurity – across the country, both public and private. Everyone should have the chance to earn some type of modest, secure defined benefit that they know will be there when they can no longer work.