Paying for Pensions

Paying for Pensions

A recent survey by Reason-Rupe (implemented by Princeton Survey Research Associates International) thoughtfully probed a question on the minds of many municipal officials, many public employees and many Florida legislators this session: pension reform.

For the uninitiated, the pensions of our public employees, especially our first responders, is a subject both of considerable political drama and of considerable financial concern.

First, to the concerns:

We’re talking here about pensions, the model used to provide support in retirement for most U.S. workers (if they had anything at all) from the middle part of the 20th century until the last couple of decades. A pension guarantees a certain payment to a retired worker for the rest of his or her life. Often, some clause related to inflation, cost of living, or raises of current workers provides a periodic adjustment to the payment.

Today, most of us (if we have anything at all) have some kind of 401K or other fund that allows us to invest, and the company to invest on our behalf, with certain tax advantages. When we retire, we draw from the fund. The fund can, however, run out, if we didn’t set aside enough, or if our investments do poorly. Or the fund can produce a tidy little inheritance for the next generation, if we poured in the funds and were smart and fortunate with our investments.

From the standpoint of the company . . . or the city . . . the advantage of a 401K-style fund is that, once the employee retires, the company or city doesn’t spend any more money on that employee. The investments do the work.

From the standpoint of the worker, one major advantage is portability (one can move from job to job and not start over with one’s retirement investment, whereas pensions require a period of “vesting.” Workers who change employers often lose out considerably). Some also argue that the 401K model allows employees a degree of flexibility with their retirement planning, a valid point, but one that I think has meaning for a relatively small percentage of all workers. Most of us don’t have the time, knowledge or inclination to become really smart about our investments (pension boards, by contrast, can and should hire good investment managers whose job it is to get the investments right). Flexibility, however, may mean diversification, especially with two-employee households, and that certainly is an advantage.

It’s hard to identify any disadvantages of the 401K model for the company or city. For the worker, however, it replaces a guarantee of at least some income with a risk-based potential return that can evaporate in an economic downturn or simply prove inadequate because too little money went into the pot or, in an era of increasing life expectancy, the worker lives considerably longer than expected.

All of which comes down to this: in order to cover the living expenses of someone who no longer will be working, someone, somewhere, at sometime, must foot the bill.

Companies and cities, like ordinary human beings, can become myopic. The immediate needs for funds, the gotta get it done of today, can distract us from long-term needs. “There’s always tomorrow” the little reindeer Clarise sang to her friend Rudolph, and it worked out fine for him. But for most of us, when tomorrow comes, and we haven’t been putting the money away bit by bit over the days of yesterday, the resulting bill can be astronomical.

Many cities in Florida are doing well putting the money away today for the pensions to be paid tomorrow. Some are not. This makes them like countless other employers around the country (think about what some major U.S. automakers did during the downturn), and like innumerable workers who aren’t putting enough away for retirement.

If the issue is simple, the answers are controversial. Who should bear the burden for ensuring that retirement is covered for our public workers?

What the Reason-Rube poll tells us about what our citizens think is that it’s time for adjustments in the benefit and payment structure of our pensions. When given a set of hard choices (and these are hard choices), respondents indicated clearly that they thought the solution should come through renegotiated contracts with public employees and increased public employee contributions to their pensions.

I know this is highly controversial. I understand that. My family includes public employees. I know how they feel.

So the key word here, in the survey questions and in the work to be done going forward, is “negotiation.” Not mandates from on high, but collective bargaining between cities and their employees. Such negotiations allow all parties to confront the range of tough choices and hammer out a deal.

We’re talking fair negotiations, according to rules that help balance the playing field, but don’t tip the scales either in favor of cities or in favor of public employees (most especially first responders, where the pension problems generally are greatest).

Ah, there’s the rub. Because in the politics of pension reform, as in many other areas of life, things aren’t necessarily fair.

Stay tuned . . .