Gov’t benefits ought to be like private plans

Published 8:50 am Wednesday, May 12, 2010

Sometimes we avoid difficult issues because it is painful and causes strong and misunderstood feelings to emerge. This was the situation that developed at Christmas time when this issue came up with a retired state of Iowa employee. I made the statement that all or most state-run retirement plans are becoming grossly underfunded. He emphatically said, “You don’t have to worry about IPERS. It is fully funded.” He became quite angry, so I quickly left that subject alone.

But, of course, nobody likes to be wrong, so when I got home, I Googled IPERS. Needless to say, he was wrong.

According to an article in the Des Moines Register, IPERS is $4.9 billion underfunded and that there has to be an additional $1 million added per year, forever to honor the state’s commitment to its retired government employees. Who has to put that money in to keep the plan solvent? It was suggested that current and future employees contribute 13 percent and the employer would have to match that amount. This is a continual problem because it is the younger people who end up paying for the abuses of the older generation.

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How does Minnesota fare with its state retirement system? Different sources have stated that the state plan is carrying an unfunded liability of over $10 billion. I am not sure this is accurate, but we do know there is a problem. Currently, Duluth has a plan that is $300 million underfunded and a frozen defined benefit plan for the Minneapolis firefighters and police officers is over $200 million. There is a bill in front of the Legislature where all the citizens in Minnesota would pay into that fund to keep it solvent. Is it the responsibility of the citizens of Albert Lea to help make up that deficiency? How are Minnesotans going to pay for the underfunding of the plans that have insufficient funds to meet their obligations?

Problems are always easy to identify, but solutions are difficult and quite often create some pains for people. Having worked in the pension and retirement business, I do have some ideas. At one time, I was the consultant for 47 defined benefit pension plans. Today, none of those plans exist.

What took their place? All of them were converted to defined contribution plans, where the employee makes the decision how much he wants to put aside for retirement. It cannot exceed 15 percent and generally the employer matches a percentage of whatever the employee puts aside. Why did these plans change? It was the only way employers could stay in business. We have seen many private businesses go bankrupt (General Motors, United Airlines and many others) because of the costs of benefits, they changed their benefit package, reduced them or completely eliminated them. This would be a terrible blow to the public employee system if this were done.

What are the alternatives? Something will have to be done. Minnesota, along with five other states, uses an 8 1/2 percent return on assets to determine pension costs. This is very high according to actuaries, and it should be reduced to 4 to 6 percent return on assets. This will, of course, raise costs to fund benefits, but it is a more realistic projection of returns. It helps stabilize the plan but will result in a projected greater under funding of benefits. So it really hasn’t solved the asset deficiency problem.

There are really only three alternatives that can be considered:

1. Maintain the same benefit structure but increase the contribution level. This probably doesn’t make the employee or the taxpayer very happy, especially the taxpayer. He doesn’t receive anything for the increased taxes he would have to pay.

2. Reduce the benefits or require longer service to receive the full retirement benefit. This doesn’t hurt the taxpayer but doesn’t make the employee very happy. Normal retirement used to be 65 with a few exceptions, but now it has been changed to years of service and some people are able to retire in their early 50s. Early retirement increases costs significantly. Couple this with cost of living increases and it increases the costs dramatically.

3. The third alternative is to convert to a defined contribution plan. This has been the avenue most used by the private sector. It provides the most flexibility. This permits the employee to decide how much to contribute, where he wants to invest his money and when he wants to retire. It shifts the responsibility from the employer to the employee and it puts a limit on employer costs. There is no unfunded liability, but if he makes unwise decisions, he may have to delay his retirement because there could be a deficiency in his or her retirement benefit.

The only way that it will not be painful to the employee is if the employer contributes a large sum to make up the deficiency. Of course, the taxpayer would see a significant increase in his taxes. Each year our Legislature postpones a decision to address this problem, it makes the problem bigger. With the state facing a possible $7 billion shortfall in revenue, we will have to have the best financial people representing us as legislators.

Albert Lea resident Al Arends is the co-chairman for the Freeborn County Republican Party.