Few people understand how the state pension system works but objections to reform are legion. Even though the type of pension benefit state employees receive has virtually disappeared in the private sector, many politicians, bureaucrats and state pension managers seem to think the government sector is different, making reform unnecessary. However, government sector pension plans suffer from the same fundamental flaws as those now mostly purged from the private sector. For that reason, we must overcome these objections and start serious reform in the government sector.
Pension plans come in two basic types: defined benefit (DB) and defined contribution (DC). DB plans promise a defined payment when a person retires, whether the pension fund has the money to do so or not. DC plans pay a benefit depending on how much is contributed into the plan and how well the money is invested. In a DB plan, pension risk falls to the employer. In a DC plan, pension risk falls to the employee.
In the private sector, if a company has a pension plan at all, it is most likely a DC plan. According to the Bureau of Labor Statistics, in the Mountain geographical area to which Wyoming belongs, about 84 per cent of government workers have access to DB plans, while only about 20 per cent of private sector workers do. In fact, only 48 per cent of private sector employees have a company pension plan at all. If a private sector company has a plan, it is most likely a DC plan. That is because the liability created by DB plans is something private sector companies cannot afford.
For example, General Motors gave mostly unionized workers DB plans. In 2009, General Motors' pension debt equaled approximately $17 billion dollars. When the U.S. government bailed out General Motors, it saved the pensions of more than 120,000 retired salaried employees and 400,000 retired hourly workers with tax dollars. If the government hadn't bailed out General Motors, its pensioners would have been left without a pension.
Even though the likelihood of insolvency creates financial risks for taxpayers and both current and future pensioners, Wyoming legislators have so far backed away from serious reform.
Why might that be?
One of the main arguments against reform is that Wyoming's pension system isn't that bad.
According to the Wyoming Retirement System's (WRS) July 2014 report to Wyoming's Joint Appropriations Committee, the Public Employee Plan (the largest of eight DB plans managed by WRS), as of January 1, 2014 was 77.62 percent funded, up from 72.80 percent in February 2013.
But even 100 percent funded is sometimes not good enough. According to former Utah State Senator Dan Liljenquist:
We had the best-funded pension system in the country going into the 2008 downturn, but during the downturn we lost about 22 percent of the value of our pension fund almost overnight. […] [E]ven though we were well-funded, that the 22 percent loss in value actually opened up a 30 percent gap in our pension funding ratio—our funding ratio dropped from about 100 percent in 2007 to a projected 70 percent by 2013—even though we had paid every penny that the actuary had asked us to over the previous several decades. […] [W]e realized that if this system was dependent on stock market returns with the legislature and taxpayers required to come back and cover any funding gaps if the markets do poorly—then we felt like it was a risky proposition and one that we wanted to try and mitigate moving forward.[1]
Another objection is that Wyoming has billions of dollars saved in special accounts so the plan could be bailed out without a problem.
Wyoming has six permanent funds, which, according to the state treasury's 2013 annual report, as of July 2013, held assets worth $16.8 billion. The Wyoming Permanent Mineral Trust Fund, the largest of these funds, held $6.1 billion. With the unfunded pension debt totaling about $2 billion, it would appear there is plenty to bail it out when the time comes, right? Well, assets in the funds themselves are supposedly untouchable. Additionally, this over taxation been rationalized as a safety valve to cover state spending priorities during emergencies. Should this money be used to bail out bad management decisions instead? This is a question legislators must start asking of themselves and their colleagues.
Another objection heard, often from WRS employees, is: people just won't save for their own retirement. But if people working in the private sector save, government workers can too. There are ways to ensure employees save even if they have a DC plan. For instance, new employees could be automatically enrolled in a DC plan with a choice to opt out. A new DC plan could be managed by the existing retirement system staff, which should assuage job-loss worries at WRS.
If new employees joined a defined contribution plan instead of the defined benefit plan, the unfunded liability in the old plan would still be there, say naysayers to reform. Yes, this is true, but more importantly, no new pension debt would be created. According to the Reason Foundation's debt handbook.
A DB plan's total costs consist of two elements: (1) the normal costs of accruing benefits, and (2) the amortization costs for unfunded liabilities (akin to debt service). … the normal costs paid by government employers are used to prefund the pension system. Amortization costs—the cost component used to pay down pension debts—are separate, and the government will still be responsible for covering amortization costs, regardless of whether normal cost contributions flow to the old DB plan or to a new DC plan.[2]
The last objection to reform is easily debunked: that the benefit attracts employees. The workforce has changed and people no longer spend decades laboring away with the same employer. In fact, the mobility of young employables today means a portable pension such as a DC plan is more attractive than a plan that takes years to be eligible for. In addition, a better tool to attract the workforce of today is higher salaries, something a reduction in pension costs would allow to the state to offer.
Let's face it, companies in the private sector are eliminating the risks created by DB plans and so too should government. None of the arguments against reform stand up to careful analysis. To ensure retirees have a pension in the future without sacrificing the financial future of our children and grandchildren, Wyoming's state pension plan must be reformed.
[1] Leonard Gilroy, "Closing the Gap: Designing and Implementing Pension Reform in
Utah—Interview with Dan Liljenquist, former Utah State Senator," Reason
Foundation, September 17, 2013, http://goo.gl/fipGs6
[2] Lance Christensen, Adrian Moore, "Pension Reform Handbook: A Starter Guide for Reformers," Reason Foundation, 2014, p. 97