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Friday, Nov 21, 2014
Editorials

Put state’s retirement risk on workers, not taxpayers

Published:

There are a lot of conflicting claims about Florida House Speaker Will Weatherford’s plan to phase out the pension for state workers.

But if you want to know what would benefit taxpayers, you need only consider that most American businesses have done exactly what Weatherford proposes: move from a pension to a 401(k)-style retirement system.

Eliminating the obligation to pay a defined lifetime retirement benefit, regardless of how the market performs, reduces risks and costs.

The actuarial study of the state pension phase-out plan found it would save taxpayers $9.8 billion over the next 30 years. It estimated the transition would realize $12.9 million in savings by 2015-16.

The state spends about $500 million a year maintaining the Florida Retirement System, which serves about 632,000 workers and 135,000 employees.

As Weatherford told us, “Why spend $500 million from general revenue? You are diverting money that could go to education or other critical state needs into a pension.”

In contrast to those states and local governments in financial crisis due to underfunded pensions, the Florida Retirement System is funded at 86.9 percent, which is considered healthy.

But that could change quickly.

The independent government efficiency organization Florida TaxWatch points out the funding ratio has been as low as 53 percent and as high as 118 percent in the last 25 years.

The ratio has been dropping in recent years. The growing unfunded obligation, Weatherford correctly warns, is a “fiscal time bomb.”

Moreover, as TaxWatch found, when the pension has enjoyed surpluses because of robust investment returns, the Legislature used them to reduce contributions to the plan and improve benefits — spending that eventually turns surpluses into deficits.

The House already has passed a plan that would require new employees to sign up for the 401(k) or defined contribution plan, but would maintain the pension for existing members.

The legislation faces resistance in the Senate, where leadership prefers a plan to continue the pension but give workers incentives to choose the contribution plan that comes with no state guarantee.

We don’t see the Senate’s idea doing much to diminish the state’s obligation.

Workers understandably want the guaranteed pension.

The justification for better public worker benefits once was thought justified by the lower salaries for government work than for similar tasks in the private sector. But public wages now are vastly improved, often higher than private pay.

A case can be made for providing pensions to police and other first responders with dangerous jobs.

But why should the typical public employee enjoy a benefit denied most American workers?

This change wouldn’t rob them of a strong retirement plan.

A 401(k)-type plan does require employees to assume more risk, but it also gives them far greater control of their retirement investments, and allows them to move to other jobs without penalty. A pension, in contrast, forces workers to stay with the same employer to achieve the maximum benefit.

In any event, there should be little doubt phasing out the state pension will be good for taxpayers.

As TaxWatch says, a defined contribution plan, by definition, is fully funded: “Instead of sophisticated guesswork determining what today’s contribution should be to cover the costs 30 years down the road, costs are calculated in real time based on actual salary … and cannot have unfunded liabilities.”

Lawmakers should recognize the financial wisdom of removing both guesswork and politics from the state retirement system.

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