Some of us (well me anyway) have been saying since 1993 (the first of three times I participated on a governors commission to evaluate state worker benefits) that the benefits for state government workers are overly generous, too expensive and unsustainable. Today the quest to reign in these costs is front-page news across the country and (I cannot believe I am saying this) some politicians are going too far. In New York, a candidate for governor wants to replace the defined benefit pension with a defined contribution plan – 401(k). This was never a good idea in the private sector and it is not good in the public sector either.
Defined contribution plans place an unrealistic burden on workers to save, invest wisely and then to manage distributions over their retired lifetime. America has yet to see the full consequences of abandoning defined benefit pensions.
The problem is not the defined benefit pension; it is the abusive design of those plans. Things like cost of living adjustments built into the formula, heavily subsidized early retirement provisions, and earnings formulas that allow overtime in the final years of work to determine the lifetime pension.
What state and all workers need is a reasonable (affordable) defined benefit pension that guarantees a lifetime income supplemented by a defined contribution vehicle where the cost is shared by the worker and the employer. This requires a substantial reworking of defined pension plans to assure they provide a basic benefit at a modest percentage of payrolls.
As appears the case with many problems today, the political overreaction solves little and ultimately creates greater problems in the future.
With the growing financial pressure on Social Security and Medicare, the few Americans with a guaranteed retirement income coupled with a lifetime of not saving, America will be tested as never before in the years ahead. Retirement may be a dream realized by very few.
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