The Key to Pension Savings: Employees Pay Half
- 04 May 2012
- Written by Marcia Fritz
REFORM - California’s fiscal issues are as complex as they are plentiful. Solutions are elusive and often painful.
But there is a fix that will make resources available at every level of state and local government. The Governor put it together, and Republicans said they wouldn’t change a word.
The most impactful provision of the Governor’s pension reform plan would require state and local government employees to pay half the cost of their retirement plans – not unlike those who are fortunate to work for private companies that match their employees’ 401(k) contributions.
If public employees agree to pay half, the savings will begin immediately and support services and jobs that would otherwise be cut. The “devastating” cuts that City Administrative Officer Miguel Santana recently warned about don’t have to be so devastating.
Like every other city in California, pension costs in Los Angeles are growing faster than any other spending category. According to Stanford University’s Institute for Economic Policy Research, the city’s costs for its three pension systems grew 11 percent per year between 1999 and 2011, twice the rate of spending growth on police, fire, health, sanitation, public assistance and recreation. As the city cuts services across the board, pension costs go nowhere but up.
Paying half won’t be a shock to teachers or state employees. They already pay half or close to it. But many local government employees still pay little or nothing for retirement benefits that include guaranteed six-figure pensions and healthcare for life.
According to a study by Capital Matrix, a city employee who begins a career at age 27 with a $45,000 starting salary and normal raises can retire at age 57 with retirement benefits valued at $1.2 million. A similarly compensated teacher will receive benefits valued at $500,000 and an employee of a large corporation less than $400,000.
Only ten percent of employees in the private sector still participate in a defined benefit (pension) plan compared to 87 percent of state and local government employees. Taxpayers assume all the risk of a pension plan’s investments, because benefits are guaranteed even when the investments lose money – one of the reasons the city’s pension systems have a $27 billion shortfall. Governor Brown’s plan would allow current employees to keep their benefits, but future state and local government employees will be offered a more limited pension plan combined with a defined contribution plan that shares the investment risk.
In 1999, the Legislature passed what some have called the most expensive mistake in California history. Senate Bill 400 increased pension benefits retroactively, and allows employees to pad their final year’s salary with unused vacation time, uniform allowances and educational expenses to inflate pension checks -- a practice that continues today. Over 4000 retired LA County employees make more in retirement than they did working. In Ventura County, almost all of the 148 county retirees with annual pensions of more than $100,000 receive pension checks that are higher than their paychecks.
Public opinion polls show that three of every four voters support pension reform, but they are much less certain about tax increases. A bi-partisan legislative solution to California’s state and local pension crises would show voters that lawmakers are serious about cutting wasteful spending, and those new taxes will be used for the services we need. The Legislature has until June 28 to put the Governor’s plan on the November ballot. Let’s get it done.
(Marcia Fritz is a CPA with the California Foundation for Fiscal Responsibility. She can be reached at firstname.lastname@example.org) -cw
Tags: pensions, California, Stanford University, pension reform, California Foundation for Fiscal Responsibility
Vol 10 Issue 36
Pub: May 4, 2012