Let’s Scrap Pension Systems Altogether

monkey-474147_640The Dallas Police and Firefighter pension system is a mess.  As with many big-city pensions that run the risk of bankruptcy, there are many factors that have contributed to the underfunding of the pension system:

  • A generous system that allows workers to take lump sums from their pensions while remaining on the job (this is the Deferred Retirement Option Plan, otherwise known as DROP)
  • Pension benefits that begin as early as age 50
  • A board that guaranteed an 8 percent return on investment, considering the fact that there were some highly questionable investments.

From looking at the pension fund’s asset targets, it appears, in my humble opinion, that the fund was too top heavy on real assets (land and infrastructure), international investments (including equities and debts), and low on basic domestic growth and dividend stocks.   In fact, in 2006, the pension board invested in a land deal (one of several) to replace traditional investments that were considered “too risky.”  The result?  A loss of over $20 million on a speculative Arizona land deal that was purchased at the height of the real estate boom.

Dallas is not alone in the mismanagement of its pension fund that could leave taxpayers on the hook for a whopping $1.1 billion.  Pension funds all over the country are going broke or bleeding profusely:

  • CalSTRS, California’s teachers’ pension fund, lost $125 million on a Florida land investment two years ago.
  • Chicago’s Municipal Employees pensions fund is bleeding $1 billion, forcing taxpayers to pony up via a new water and sewer tax.
  • Even South Carolina’s state employee pension fund is facing a $24.1 billion shortfall due largely to “buy high, sell low” stock investments.

It’s time to scrap pension funds for future workers and allow them — actually, require them, to set aside their own 401(k)-type accounts with contributions matched by employers.  Let workers manage their own money as private employees around the country do every day.  If you are a public employee and that prospect sounds frightening, please reread the horrific examples above of how “experts” have handled your money and ask yourself if you couldn’t do a better job.  I am betting you could.  If you still have doubts, select your investments by hiring a chimpanzee to throw darts . Seriously.

Comments (2)

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  1. Jack Towarnicky says:

    Too many states have laws or constitutional provisions that (seem to) preclude cutbacks in accruals – they’ve bound themselves into a vesting “scheme” that is akin to some European systems.

    So, instead of triggering endless and costly litigation, have the state, city, county define their financial commitment (how much they are willing or able to spend). Then, confirm that to the workers and offer to use it in the Defined Benefit pension plan – confirming to employees that they must contribute as needed to fund the benefits. In such a situation, the employee contribution would vary from year to year as needed to fund the current accrual as well as to amortize any unfunded, accumulated liability.

    Concurrently, give the workers the option to opt out and take the same amount of employer funding in the form of a contribution to a 401(k) or comparable individual account defined contribution/savings plan. Most of those state, county, city laws/ordinances probably allow for collective bargaining to substitute benefits.

    If you get resistance to the former, I doubt there is a court in the land that has the authority to mandate new taxes to compel contributions – as I believe all states reserve the authority to tax and spend to the legislature (county government, city counsel, as appropriate).

    Resistance should be met with a full cut off in employer funding – which will trigger a “reverse tontine” effect – current beneficiaries will exhaust all of the monies in the trust … which will create an incentive for current workers to opt out anyway.

    Not much you can do about current retiree unfunded liabilities … other than to shift the burden of unfunded liability onto the workers who decide to remain in the defined benefit plan. Opting out to a 401(k) will leave that burden with the state/county/city.

  2. Joel L Frank says:

    In order for a DB plan to achieve 100 percent funding the employee and the employer must contribute their agreed upon share.

    In the long history of the DB plan the employee has never taken a funding holiday. If they took a funding holiday each time the employer did the DB system in this nation would be many times worse than it currently is.

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