The High Cost of Killing Public Pensions

The city of San Diego may want to get a head start on hiring this year. They may have trouble finding applicants after a new measure that Republican and business interests plan to place on next June's ballot, which seeks to get rid of the current traditional pension plans for new employees and stick them with a risky 401(k) style plan with no guarantee of an adequate retirement.

Backers of the ballot measure claim that switching to 401(k) plans will save the city money. But they have yet to provide any financial data that proves this, and what's more -- recent information shows that switching to a 401(k) plan for new employees would actually force the city to pay more money to fund it.

According to recently released retirement system data, as reported at voiceofsandiego.org, a new 401(k) plan for public employees may not do anything to help San Diego's massive pension deficit, and actually could cost the city $94 million more over the next six years. That figure isn't an anomaly -- these so called 'defined contribution plans', made popular by companies in the private sector looking to get rid of their responsibility of helping employees retire, are more costly to both retirees and taxpayers alike than traditional pension plans.

Recent cost analysis reported by the National Institute on Retirement Security (NIRS) found that implementing defined contribution or 401(k) plans can cost almost twice as much as traditional pension plans, or defined benefit plans. The most immediate costs are to the employer implementing the plan, but there are additional costs that 401(k) style plans can harbor over time.

Unlike 401(k) plans, traditional defined benefit plans assure lifetime income, keeping millions of households out of poverty in their senior years. The private sector trend to move away from traditional plans towards risky 401(k) or defined contribution plans has had a negative effect on retirement prospects for those Americans approaching retirement age.

"Among early Baby Boomers (born 1946-1954), 49% of those with defined contribution plans, as well as 50% of those with no retirement plan, are at risk of being unable to maintain a pre-retirement standard of living after they stop working," NIRS reports.

Among households relying on traditional plans, that number drops to just 15%, showing that these traditional pensions are much more likely to help retirees achieve financial security than those without such pensions. In turn, traditional pension plans save governments money by reducing the number of citizens who must rely on public assistance as they grow older. Traditional pensions also provide essential benefits like spousal protections and disability benefits that are generally not available in 401(k) plans.

City and state pensions also produce positive results for employers and city services. Employees eligible to earn public pensions often stay in their jobs longer and are more committed to their employer. Providing an option for a secure retirement also helps our government attract and retain qualified highly skilled workers dedicated to delivering public services.

As we've said before, imposing drastic changes that would switch more people to risky retirement investments would only drive more retirees into poverty and reward the Wall Street bankers who ruined our economy. Traditional pension plans are already proven to help Americans achieve retirement successfully. All in all, it's clear that 401(k) plans are not going to solve any state's pension problems, pose no long-term solutions to budget crises, and will even cost taxpayers more money in the immediate future.