Article: We Should Stop Playing With Public Pension Plans: Joe Mysak

The following article predicts dire consequences for future pensioners. It makes one think--especially now that Ohio has not only the "defined benefit" that is overwhelmingly preferred by STRS members, but it also has the "defined contribution" plan that it touts to younger STRS members--especially with examples in it STRS booklet that cites cases of STRS members being able to have over $750,000 in his/her account upon retirement.

Nancy Hamant

Dec. 2 (Bloomberg) -- It may be that the only thing worse than doing nothing about public pension plans is doing something about them.

The latest ``something,'' according to rating company Standard & Poor's, is switching from defined-benefit to defined- contribution systems.

The company published a report on the subject, ``Public Employers Are Exploring a Switch to Defined Contribution Pension Plans,'' in November.

You may remember how this defined-contribution business swept through the private sector more than two decades ago. We're doing away with the stodgy old defined-benefit pension plan, the companies told us. We're going to replace it with a regular contribution of a percentage of your salary. You do the same and it all goes into a private investment account that will just grow and grow and grow until you retire. When you're 65 you'll be a millionaire!

This approach somehow never caught on with states and municipalities, most of which still run their own public pension plans on the defined-benefit system. Only four states -- Alaska, Florida, Michigan and Ohio -- have defined-contribution plans, according to the National Association of State Retirement Administrators.

More states and localities are thinking about such plans now, though, as the costs of their retirement systems increase. ``The main attraction of defined contribution plans to employers is obvious from the name,'' writes Standard & Poor's analyst Parry Young. ``The contribution is defined, allowing for greater certainty in financial planning.''

Investment Risk

States and municipalities couldn't just dump their existing plans over the side, of course; they would begin defined- contribution plans with new employees. So are they all going to take this route?

Not so fast, says S&P, and for the same reason most people in the private sector are scratching their heads every time they open their 401(k) plan statements: ``The switch to defined contribution in effect transfers complete investment risk from the employer to the employee.''

And while some public employees might succeed in building a nice nest egg that will carry them through their retirement years, many won't.

Public Assistance

Here's where it gets interesting, from a credit perspective, according to the rating company. If investment performance flags, ``then the retiree could be looking at a lower-than-expected standard of living, which is not a happy prospect.''

Decidedly not. We're probably not talking about cutting back on things like, say, the annual vacation to France, either, but on more humble requirements, like food.

And if the shortfall in savings is large enough, S&P says, the retiree may need public assistance. ``Governments, unlike corporations, cannot so easily write off the needs of their retired employees if projections fail to come to fruition,'' says the rating company.

Which means? ``These unanticipated increased employer costs to make up for below-average retiree wealth could offset, partially or totally, the earlier direct benefits from lower, more predictable contribution rates gained through a direct contribution conversion,'' the report concludes.

Playing Games

Well, that's just great. And you know S&P is right. You know that expecting everyone to save the perfect amount for their own retirements is unrealistic. Wishing that everyone would behave responsibly, on the one hand, and that the investments they choose appreciate sufficiently so that their savings last a lifetime, on the other, won't make it so. There are going to be casualties.

The one thing predictable about the future of public pensions in the U.S. is that there's going to be more hysteria about the subject, more headlines, more frantic searching for magic answers.

There is no such thing as public pension perfection, and there is no secret formula for achieving it. States and municipalities have to guard against giving away the store in terms of benefits. They have to be sure to make the annual contributions to their pension plans. They have to avoid using gimmicks to attain short-term budget relief in exchange for long-term headaches. They should stop playing games with their pension plans.

That would leave more cat food for the rest of us in our dotage.