“Public Pensions Should Not Follow Private Sector Failures!”

By Mike DeBord, Co-Chair CRCEA Retirement Security Committee

How should California’s government retirement plans be funded? Most are designed to be “fully pre-funded”, but what about “pay-as-you-go” or “partially pre-funded”? The challenges facing future retirees and the taxpayer are described in the various approaches listed below.

Social Security is largely a “pay-as-you-go” program where current workers pay the annual cost of retiree benefits. Any year’s excess income goes into a Trust Fund. But when the cost of the monthly benefits exceeds the income from payroll taxes, the Trust Fund is drawn down to keep the checks going. Social Security reports that the Trust Fund will be fully exhausted by 2034 and without changes would only be able pay 77% of scheduled benefits. With the increase of retirees and fewer American workers in the future, this program faces real funding problems!

Private Sector workers have, over the last 30 years, been losing their defined benefit plans. Companies discontinued their pension plans and some, not all, replaced them with 401(k) plans that were never designed to be a retirement plan. This scheme is woefully underfunded and 58% of private sector workers now have no retirement savings. This “partially pre-funded” approach is a time bomb for future generations and will significantly increase poverty for retirees. It will have severe repercussions for state and local governments that are responsible for providing services to the elderly who won’t be able to support themselves. The taxpayer impact of these short-sighted retirement changes/losses in the private sector will be huge!

Public Sector workers still have defined benefit pensions that are designed to pay lifetime retirement benefits and be “fully pre-funded” (about 70% from investment returns with the remainder from employer and employee contributions). After the 2007-08 financial crisis, the funding levels of defined benefit plans dropped noticeably but are now improving with the economic recovery. But outspoken pension critics jumped on the projected “unfunded liability” of public pensions saying they could total up to $2-$4 trillion nation-wide (using low return rate assumptions in their projections instead of the actual higher rates of public pension systems). They use this “unfunded liability” figure to persuade the public to vote against public pensions.

But the real question is “What is the “equivalent unfunded liability” for the private sector?” What would it take for the private sector to be on par with the public sector with respect to retirement assets? That shortfall is at least $29 trillion—a true U.S. crisis in the making!

So tell me again why we need to change our pre-funded public retirement systems to be more like the staggering failures in the private sector???


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