A bill introduced in the Nevada Assembly, AB 342, (pdf) should be carefully watched. Once more the Public Employees Retirement System is under assault from ALEC inspired Republican interests in, transforming PERS from a defined benefit system to a defined contribution system. In the case of AB 342 there’s a gimmick. The bill would create a hybrid system for those who are hired after July 1, 2014, including the creation of a defined contribution individual trust account paid into by the employer (at a 6% rate.)
The first, and the most obvious, reason to oppose this bill is that We Don’t Need It. RPEN reports “Due to careful management, PERS’ unfunded liability has decreased recently and the system’s assets have grown to a record $28.6 billion which speaks to this time-tested system’s viability.” [Review, April 2013]
Why would anyone think we do need to change the PERS system from a defined benefit to a defined contribution, or in the case of AB 342, some kind of hybridization?
The “privatization” of public employee retirement has been a common motif of narratives spun by conservative organizations, among which ALEC is one of the most notable.
“The solution to the funding crises in state pension plans will require fundamental reform. Everything should be on the table, including changes in benefits and increased employee contribution rates, as well as employer contribution rates. These plans should consider replacing their defined benefit plans with defined-contribution plans for new employees.” [ALEC]
First, ALEC and related organizations would like us to believe that Public Employee Pensions are IN CRISIS! Crisis, I Say! However, even if we revert to the wake of the last financial meltdown the situation nationally (and in Nevada) was not quite so alarming as the advocates of defined contribution plans would have us believe.
Information from the GAO should have been reassuring back in that day:
“Government Accountability Office said last summer, “our analysis shows that state and local governments on average would need to increase pension contribution rates to 9.3 percent of salaries— less than .5 percent more than the 9.0 percent contribution rate in 2006 to achieve healthy funding on an ongoing basis.” Divided between employees and employers in whatever way negotiated, this is hardly an earth-shaking departure from the status quo.” [PS.org]
In short, the logic in the aftermath of the financial collapse was that defined benefit plans for public employees were in crisis because there was a down turn in the value of their investments and therefore the plans should be transformed into defined contribution plans which place retirement accounts in greater jeopardy during times of financial market volatility. If this doesn’t make sense to you give yourself a Big Gold Star — because it doesn’t.
Secondly, the push toward defined contribution plans, or some variations thereon, obfuscates the result — that the defined contribution plans mean lower benefits for retirees and more expenses for the state to maintain the program. [FLPE]
There have been some analytical studies to support this conclusion, (using DC to mean defined contribution, and DB to mean defined benefits):
Generally, the reports found that the DC plans carried a higher price-tag than maintaining the current DB systems. In both the Michigan and New Hampshire reports, the proposed employer DC contribution rates were scored to be comparably higher than the normal DB cost. The studies cite that higher costs derive primarily from administrative costs – whether they are outsourced to a third-party or expanded internally, legal and consulting fees assumed by public pension fund handlers, and additional operating costs. [FLPE]
Thus, moving from a defined benefit plan to a defined contribution plan primarily augments the coffers of the administrators, legal consultants, and fund managers — not the state or the retired state employees. If defined contribution plans are more beneficial to Wall Street, then who benefits from the defined benefit plans?
We do. There is evidence of this: Traditional defined benefit plans reduce employee turnover and aid in employee recruitment. They pay higher benefits at lower administrative costs than the DC plans. The benefits are expended in local communities adding to their economies. Individuals with predictable incomes tend to contribute more to the economy as consumers. [SDCERA]
AB 342 is not a particularly useful addition to the fiscal discussions in the Nevada Assembly. We don’t need it. It won’t save anyone any more money — and may, in fact, end up costing the state more. Nor will it serve to do anything more than line the pockets of those wonderful people who brought us the Financial Meltdown of 2008 — who now want public employee retirement accounts to add to their funds to gamble in the Wall Street Casino. The bill should be watched — from a distance — in what ever dark and hidden corner it now resides.