(originally published at Fox & Hounds Daily)
The current pension reform debate – with proposals from the governor and now from a team of Republicans via ballot initiative – is drawing considerable media attention.
It’s hard to understand why.
The debate has almost nothing to do with the broader public.
The pension changes being talked about won’t change all that much or save much money for other public programs. And the plans being offered don’t respond to the real problem in matters of retirement savings.
The problem? That the number of Americans participating in retirement plans is on the decline.
You read that right. I just finished reading a chilling new report from Michael Calabrese of the New America Foundation (full disclosure: I’m a New America fellow). His conclusion: “the majority of American adults do not participate in any retirement saving plan—whether pension or 401(k) or Individual Retirement Account (IRA). Participation in employer-sponsored plans peaked in the late 1970s and appears to be at its lowest level in more than 30 years.”
In that context, any debate about public pensions that doesn’t talk about the lack of retirement savings is missing the point. The question ought to be how do we increase retirement security for the broad majority of Americans – by getting them to save and participate in retirement plans. Because that’s the real unfunded obligation – those who don’t have retirement savings will have to rely more on Social Security or other forms of public assistance.
So if you want meaningful pension reform (meaningful enough for the public to care), a proposal must focus on ways to reshape public employee pensions not merely to save money but to provide some sort of basis for greater retirement savings by people who don’t work for the government.
And the California reforms on the table don’t meet either test. Both Brown’s plan and the initiatives filed this week would set up two-tiered pension systems – different for current and new employees. The savings in such systems are likely illusory because two-tiered pension systems are unstable (they end up becoming one tier again in good times) and because savings from new employees are likely to be minimal (especially in an era when there aren’t many new employees).
And yes, both Brown’s plan and the initiatives demand more in contributions from current employees. That’s good – but it’s not enough. If current employees are going to be asked to take hits – and they should be asked, and pressured to do so – they should be asked to move into defined benefit programs that are so safe and sustainable that other Californians and their employers outside the public sector could participate in them.
That kind of program would require not only more in contributions from employees (and from employers) but also much more conservative assumptions about investment returns.
That would mean less in pensions for public workers – but much, much more in retirement, and in retirement security for the rest of us.
For now, however, the pension reform debate remains one of those Sacramento conversations that has almost nothing to do with the lives of Californians.