Why Converting Public Employees to Defined-Contribution Retirement Plans Is Wrong for Your State

 

Summary: Throughout the country, state policymakers are tasked with formulating a state budget. Whether it is a time of financial hardship or pursuing an ideological agenda, too often, those in power will explore the option of converting their defined-benefit pension plans to defined-contribution 401(k) plans for state and local government workers. This report explores the potential impact states will face should lawmakers decide to convert new public employees from a defined-benefit pension plan to a defined-contribution 401(k) retirement plan as a budget-saving measure. This report seeks to answer the following questions:

● Has the emergence of defined-contribution plans contributed to the retirement savings crisis in the country?

● Does converting a defined-benefit pension plan to a defined-contribution plan impact the overall cost to the state?

● What are the consequences of converting a defined-benefit pension plan to a defined-contribution plan?

● Does conversion to a defined-contribution plan impact recruitment and retention of public employees?

For the entire report from the National Public Pension Coalition, click here: National-Conversion-Report-1.pdf (protectpensions.org)

Commentary:

What is the difference between a Defined-Contribution Savings Plan and a Defined-Benefit Pension Plan?

A Defined-Contribution Savings Plan:

1) A defined-contribution savings plan (401(k), 403(b), 457) was not initially created as a retirement vehicle but rather as a supplementary savings account.
2) A defined-contribution savings plan shifts all the responsibilities and all of the risk from the employer to you; thus, your benefit is not guaranteed for life.
3)  Your benefit ceases when your account is exhausted.
4) There are no survivor or disability benefits and guarantees.
5)  Your benefit is based upon individual investment earnings.
6)  You assume all funding, investment fees, and inflationary and longevity risks.
7)  A defined-contribution savings plan does not have the pooled investments, professional asset managers, and shared administrative costs that a defined-benefit pension plan provides.
8) Though you bear no portability risks, accounts are not always rolled over when you change jobs.
9) Changeover costs to this plan could be significant.
10) Your employer (state) will have to bear the administrative costs of both defined-benefit pension and defined-contribution savings plans when you switch over.
11) “Payments to amortize unfunded liabilities for the defined-benefit pension plan may be accelerated” (National Institute on Retirement Security (NIRS).
12) The Governmental Accounting Standards Board “requires [an] acceleration of unfunded liability payments when the defined-benefit pension plan is closed to be recognized on financial statements” (NIRS).
13) “No unfunded obligations [liabilities] for existing members are reduced when new members go into a defined-contribution savings plan” (NIRS).
14) “The loss of new members makes it difficult to finance the unfunded obligations of the defined-benefit pension plan” (NIRS).
15) The State of Illinois will not save money. Most of the State’s obligation to TRS is for contributions not paid during the past several decades; therefore, the deferred cost of underfunding cannot be eliminated by switching to a defined-contribution savings plan.
16) Shifting to a defined-contribution savings plan can raise annual costs by making it more difficult for Illinois to pay down existing liabilities. The plan will include fewer employees and fewer contributions going forward.
17) Even with a defined-contribution savings plan option, states and localities are still left to deal with past underfunding.
18) There is a several trillion-dollar deficit between what 401(k) account holders should have and what they actually have.

A Defined-Benefit Pension Plan:

1)  You cannot outlive your benefit.
2) Your defined-benefit pension plan is more cost efficient than the defined-contribution savings plan.
3)  Your defined-benefit pension plan offers predictable, guaranteed monthly benefits for life.
4)  Funds are invested by professional asset managers in a diversified portfolio that follows long-term investment strategies.
5)  The large-pooled assets reduce asset management and miscellaneous fees.
6)  Your defined-benefit pension plan provides spousal (survivor) financial benefits.
7)  Your defined-benefit pension plan provides disability benefits.
8)  The state is responsible for funding, investment, inflationary and longevity risks.
9)  Because you are not affected by Market volatility, your defined-benefit pension plan is a more effective protection than the defined-contribution savings plan.
10) Because teachers understand the value of such a plan, they are willing to give up higher wages.
11) A defined-benefit plan encourages a long-term career and stable workforce.
12) Your defined-benefit pension plan provides you with self-sufficiency in retirement; it is associated with far fewer households that experience food privation, shelter adversity and health-care hardship.
13) Your defined-benefit pension plan is less expensive for taxpayers than Social Security – a reason why legislators, et al. had negotiated for Illinois teachers to not pay into Social Security.
14) Defined-benefit pension plans contribute over $100 billion to annual local, state, and federal revenue in the U.S. and provide capital to financial markets (NIRS).

The Teachers’ Retirement System of the State of Illinois is the 42^nd largest pension system in the United States, and provides retirement, disability and survivor benefits to teachers, administrators and other public-school personnel employed outside of Chicago. The System serves 434,000 members and had assets of $64 billion as of September 30, 2021.

Sources: The National Institute on Retirement Security (NIRS), Center for Retirement Research at Boston College, National Conference on Public Employee Retirement Systems, Center on Budget and Policy Priorities, and the Teachers Retirement System of Illinois (TRS)

-Glen Brown