This commentary is by Paul Dame, chair of the Vermont GOP.
Government employees are the only workers left in the country who are still largely tied to that outdated retirement option known as a pension.
Union representatives will tell workers that they “avoid the risk” by having a pension instead of a defined contribution plan, like a 401k. But by avoiding market risk, they are taking on other risks that few people ever share with them. My point isn’t that one set of risks is better than another, but that employees ought to have the choice as to which risks they find more acceptable.
A pension plan does mitigate a few important risks than many people find valuable and beneficial. The most valuable risk that pensions mitigate is the risk that you can live too long. Over 25% of retirees who make it to 65 are going to live past the age of 92, so having some guaranteed income can help ensure that your money lasts as long as you do. A pension also takes the risk of making the right investment choices out of your hands, and transfers that risk to the ones making decisions for the plan. For people who don’t want to make those decisions this can be an important relief.
But there are a few things often missing from the discussion of those benefits. The first is that there is a multi-billion dollar insurance industry that provides the same kind of benefits through a financial product known as an annuity. There are several A-rated companies with far more assets and professional experience than the state of Vermont. These companies also have to respond to the free market and offer more benefits and flexibility than the kind of cookie cutter state pension plans that have changed very little in structure over the last 80 years.
A pension is a promise to pay. The linchpin of every kind of future promise is both the intent and ability to fulfill that promise. As we have seen over the years, that while on paper the state seems like a reliable promise keeper in that they have never committed outright default, the reality is that they keep coming back to employees every few years to change the terms of the arrangement, as they are doing now. The reason is because the pension system is patently unsustainable. Even VSEA members and advocates will admit that if you don’t have new people paying in, the pension system cannot meet its obligations. That should alarm everyone – especially younger state employees.
What Governor Scott and Republicans want is just to give our state employees a choice. If they want to stay in to the current system which has led to multiple renegotiations every time actuarial data demonstrates the picture isn’t quite as rosy as we had hoped – let them stay in. But if workers want the option to take an alternative route, why should we stop them? Some people would rather take their money now than a promise for money in the future. And in light of increasing inflation that promise may not provide the same value that it sounds like today.
Yes, there are risks to a defined contribution plan (DC Plan), like a 401k. The risk is that if you don’t put in enough, or you take out too much or too early, you could run out of money when you need it most. The other risk is that you could make some bad investment decisions and lose some of your savings in a market crash. But let’s not forget that there are other benefits to these plans that many state employees don’t get from their pension plan.
First of all in a DC Plan your money belongs to you – and to your family. If you work 30 years driving a plow truck for the state, and pass away a year after you retire – your spouse, children or charity of your choice get all of the wealth you accumulated over your life time. With a pension, dying prematurely means the state keeps your money and will use it to help another state employee who lives longer than you. Sometimes you can share your income with your current spouse, but you can’t leave any of it to your kids after that. So DC Plans can build the kind of inter-generational wealth that can help families climb out of poverty in a way that pensions can’t.
Secondly, in a DC Plan your money is portable and belongs to you, not the state. The IRS gives provisions for younger Vermonters desperately looking for housing to tap into their DC Plan to access money for a down payment on a house. And having a paid-off house is one of the most reliable ways to secure a successful retirement. DC Plans also allow for hardship withdrawals, or even loans that you can pay back which are incredibly helpful for younger employees.
If people in your family routinely live into their 90s, and you have no children you will probably do better with a pension plan. But if folks in your family don’t tend to live that long, and you want to be able to leave something behind to your children – especially a child with special needs – an inflexible state-run pension might not be the best choice for you and your family. Like with many choices in life, a lot depends on your circumstances, and all Republicans are advocating for is to let the individual employee themselves decide what is right for their own circumstances. One of the problems we have with our current Democrat-controlled government is they have a penchant for one-size-fits-all approaches, and the facts are that some people need more flexibility and more choice – and that’s what Republicans are advocating for.
If 100% of employees love their pension and want to keep it, then giving them the option will have no adverse affect. But if even a dozen or so workers decide that moving forward they want more flexibility and control over the money they’ve worked for – then why are Democrats and union leaders going to get in-between state employees and their money?
3 thoughts on “Paul Dame: The problem with pensions is the pension system is patently unsustainable”
There are many problems with the State pension system……..A primary problem being that the State Employees Union(s) effectively owns the legislature……Our legislators, a vast number of whom, have no substantial business experience nor the self confidence to stand up to the legislature on required pension revisions……They are simply afraid of the union(s) and the perceived actions the union(s) could take against them at the polls.
The pension “problem” started a long time ago and a number of States were teetering on bankruptcy because the golden parachutes (including healthcare benefits) were unsunstainable. Going into the Bush years, 401K’s put private sector retirements into the casino (aka stock/bond markets) which made financial planning titans lots of money. 2008 showed retirement accounts resulted in a significant wealth transfer to JP Morgan & company. The well of taxpayer money funding government employees and teachers is running dry. Employee contributions will nearly disappear due to inflation and rising costs for everything. The days of guaranteed retirement pensions covering living expenses are gone – ask a number of retirees returning to the workforce. The ponzi scheme is exposed – unless you are six-seven figure executive, there is no pension or retirement money.
With a ‘defined benefit plan’, taxpayers guaranty a rate of return on the various investments that sustain the plan. No private investment plans make this guaranty. ‘Past perfromance is no guaranty of future sucess.’
With a ‘defined contribution plan’, taxpayers guaranty the specific amount to be invested by taxpayers, not the rate of return from the investment. Given that no other investment plans guaranty a rate of return, why does the Governor and the Legislature make that guaranty?
Because the recipients of the guaranteed rate of return contribute more to the campaigns of these crony politicians than anyone else does. It’s simply pay-back. And it sucks.
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