February 27, 2013 in Opinion

Editorial: Pension plan change raises perplexing questions

 

Washington’s public employee benefit plans are among the best-administered in the United States. With the exception of two plans closed to new employees in 1977, assets exceed projected obligations. The older plans do require substantial additional state contributions, but even with the state’s current budget shortfall the problem is manageable.

So state and local employees are understandably perplexed by legislation that would fundamentally change a system that works for them, and the state. SB 5856 would convert the state’s defined benefit plans, which make fixed monthly payments to retirees, into plans akin to private sector 401(k) plans that allow employees to set aside their own money, possibly matched by employers.

We support pension reform, but we have questions, too.

Bill supporters say state workers deserve no better than their private sector peers, whose employers have dumped defined benefit plans because of runaway costs. Such plans also make less sense as workers move from job to job instead of staying with one employer for a lifetime. But employees assume all the investment risk with defined contribution plans like 401(k)s, and many sustained huge losses when the stock markets tanked five years ago. Many have only recently fully recovered.

The State Investment Board, which manages more than $60 billion, also took its hits, but its annual rate of return remains above 8 percent, the benchmark historically used to determine whether pension assets will grow enough to fully pay retirees. Still, the Legislature prudently advised the board to lower the assumed returns to a more conservative 7.7 percent.

The state plans would be replaced by individual accounts administered by the Department of Retirement Systems, which would offer a selection of what are commonly referred to as “lifetime funds” that adjust the balance of assets as employees age. All employees less than 45 years of age would have their accumulated benefit transferred into these new accounts, into which they would make mandatory contributions with an 80 percent state or local match.

SB 5856 foes say the matching contributions to individuals could exceed the amount paid into the existing plans. Administering thousands of individual accounts would be expensive, and overall returns would fall because more cash would have to be available. The fiscal note for the bill is not yet ready.

Most importantly to the state workers, 401(k) portability makes no sense when school systems, law enforcement and other government agencies want to retain their best teachers, deputies, etc.

The state plans do have challenges, especially if the courts overturn legislation that repealed cost-of-living adjustments and the sharing of big gains from prerecession investments. Those changes made a lot of sense. Unfortunately, the bill would almost certainly bring another lawsuit. In testimony before the Senate Ways & Means Committee, one official said state computer systems will not be able to handle the changes made by the bill until mid-2015. That suggests there is time enough for some of the existing disputes to be resolved before action on this bill would be timely.


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