I figured by the time I read an article about government employers taking a page from the private sector, I would be too old to read the small print and too senile to care. But low and behold, the Wall Street Journal (see Jeannette Neumann, “States Shift to Hybrid Pensions“) reports that states are waking up to the fact that their pension funds are sorely lacking the money needed to pay retirees' generous benefits. Utah and Michigan have begun “hybrid” plans for newly hired public workers. These plans are a combination of defined benefit (the state contributes to the worker's pension) and defined contribution where the worker contributes his or her own money to the pension – similar to a 401(k) plan.
As Neumann notes, six other states have hybrid plans as well…not enough, in my opinion, but hey, it's a start. If I am a bit enthusiastic about this undertaking of pushing workers to fund more of their retirement plans, it is not for a lack of compassion. Indeed, hybrid plans are compassionate, progressive and environmentally responsible. Let me explain:
States that are adopting hybrid plans recognize the burden of debt placed on future generations if they don't act now. Saddling our children and grandchildren with unfunded pension liabilities means raising their taxes, cutting their state and local services and leading them down a path of low growth and high unemployment. To boldly act, even in the face of protests from some who may be used to the old way of doing things, is true compassion.
Hybrid plans are progressive. What? How so, one might ask, if government benefits are being reduced and employees have to cough
up the difference? Since many who identify themselves as progressives often look to Europe for solutions, this is probably one of the best ideas we can take from Europe. Many countries already have public-private pension systems in place and have operated in this vein for decades. Think the Netherlands, Switzerland and the United Kingdom to name a few, as well as non-European countries such as Chile and Argentina. At least 30 countries in the world have varying degrees of private participation in public pension systems, so one could say that the United States is a little “behind the times” in this regard.
Finally, the move to hybrid pensions is good for the environment – the financial environment of every potential retiree. There is so much hype these days about being good stewards of the physical environment. But we often overlook the environment of personal finance. Free market economists argue that when individuals have ownership in something – a house, for example – they are more likely to invest in it, take care of it and maximize its potential than if they rent the house and have little or no vested interest.
Likewise, when workers are contributing their own money knowing that their contribution is a key compoment in their retirement security, they will more likely want to know what is going on with it. They will ask pertinent questions: Which investments provide better returns with lower costs? Is the employer providing the information and resources I need to make sound decisions? Whereas, pensions that consist entirely of government employer contributions leave workers at the mercy of poor investments, underfunding and political maneuvering.
Bottom line: This is a step forward, not two steps back. Now if we could just get Social Security reform on the table!