Defined benefit plans should be closed for the good of workers
With numerous examples around the country, it has become clear that there are poor political incentives to properly fund public pension and health care systems.
Consider the case of Detroit, as well as the states of Michigan and Illinois. In each case, pension systems were supposed to be fully funded, yet large gaps remain between what employees and retirees have earned and how much money is in the systems.
Detroit is spending 42.5 percent of its budget on retiree benefits. The Michigan Public School Employees Retirement System, the state's largest retirement system, is underfunded by $24.3 billion, despite some reforms last year. In Illinois, Moody's says the state has $133 billion in unfunded liabilities, which is nearly two-and-a-half times the total state budget.
The lack of funding for the MPSERS has meant that school districts now are spending about 30 percent of their costs per employee on retiree health care and pensions. But only 10 percent of that money is being spent on the benefits for that employee with the remaining 90 percent being used to catch up on the underfunding.
School districts and local public entities spend a lot of time complaining about a lack of revenue from taxpayers, but the best thing state and local governments could do to ensure more stable funding would be to move to defined-contribution retirement plans like most state and private sector employees enjoy. The advantage of 401(k)-type plans is that the state and workers know what they are getting.
"You are an employee of the city and if the city goes down, so do you," Jason Brinker, a policeman in Harrisburg, Pa., which recently went bankrupt, told The Economist.
For the good of public employees and taxpayers, defined-benefit pension systems should be ended for new employees now.