EconoMeter: Should public pensions be changed?

By Roger Showley

Saturday, October 23, 2010 at 11:17 p.m. - SignOnSanDiego.com

Ask the economists: Each week the Business section will ask its panel of economists to weigh in on an economic issue of concern to San Diegans. They’ll answer yes or no, up or down or give a neutral response. Sometimes they might be unavailable to participate. If you have a question you’d like them to address, send it to roger.showley@ uniontrib.com.

They’re rioting in Paris, they’re fretting in Sacramento, they’re battening down the hatches in San Diego all for the same reason – the worries about public pension finances and the need for reform to keep governments from bankruptcy’s door. So our question, recommended by a reader, is this:

Following the November elections, do you favor action at federal, state and local levels to address the growing problem of public pension finances? What one change would be the most advisable economically for any level of government?

Marney Cox, San Diego Association of Governments

Answer: Yes

Because most public pensions are guaranteed by law, taxpayers become liable for any short falls. This creates the illusion of a risk free investment. Public pension funds should be given an option: if they want to keep the public’s guarantee they need to invest in riskless securities, like treasury bonds, not high risk securities like the stock or real estate market.

This choice would affect the pension fund’s expected rate of return, low risk 4 percent and high risk 8 percent, and how much of a public employees paycheck would go towards their pension - higher for low risk or lower for high risk. Pension funds choosing to invest in riskier securities would not be eligible for the taxpayer guarantee.

Lynn Reaser, Point Loma Nazarene University

Answer: Yes

Public pension funds could be the next financial crisis as government agencies face enormous unfunded liabilities. In California, a Stanford study indicated that the funding gap may now exceed $500 billion. Although it appears legally impossible to change retirement systems for existing employees, the public sector should follow the lead of private firms by putting new employees in defined contribution -- 401(k)–type-programs -- instead of defined benefit programs.

Rather than guarantee a monthly pension for life, government agencies would make a regular contribution to an individual’s retirement plan. The continuation of the status quo will only aggravate the unpredictability of future costs.

Dan Seiver, San Diego State University

Answer: Yes

The inexorable aging of the U.S. population will eventually bankrupt “defined benefit” public pensions if we do not muster the political will to slay this fiscal monster.

Although there are many “tweaks” needed at all levels of government pension programs, perhaps the simplest, most justified, and easiest to implement is an increase in the retirement age at which full benefits are paid.

The payoff over time from this change can be very large, and it is justified because we are living so much longer. Don’t be fooled by strikes and demonstrations in Europe. Change is coming.

Norm Miller, CoStar Group

Answer: Yes

Pension reform at all levels is essential lest we shift the tax burden to those without a current vote. Full actuarial-based funding - 100 percent funding set aside - is needed with reasonable return targets on reserves, but must be phased in.

The question is how fast to phase it in in order to have balanced budgets, which should be required at the local and state level.

Additionally we need total compensation benchmarking limits so that local officials and staff can’t use stealth to secure salaries and benefits that are more than 150 percent of market for similar positions.

Gary London, The London Group

Answer: Yes

I have more than one recommendation, but here ares my priorities:

(1) raise the retirement age to 70

(2) have employees contribute to both pension and health benefits

(3) no vesting until employed five years, and then on a stepped-up basis. In general, make public pensions more like private pensions.

Most importantly, we need to recognize that the worst hemorrhaging is with those pensions now being paid out.

I believe that vested contracts or not, the current pensions must be renegotiated. Ultimately it is in everyone’s best interests to change the terms.

Kelly Cunningham, National University System

Answer: Yes

The most immediate and positive economic impact on pension finances at all levels of government would be to ratchet up the retirement age of public employees to at least consistency with private sector plans.

This would immediately improve contributions to the funds -- lengthens worker’s compensation into the program -- lessens required actuarial contributions - by lowering expected payout -- and reduces costs of funding -- incrementally fewer workers in plan.

Having the most experienced workers performing their work a few more years is an added benefit.

James Hamilton, University of California San Diego:

Answer: Yes

This is an enormous problem that just gets bigger the longer it is put off.

Since there are legal and other obstacles for dealing with existing pensions, the obvious place to begin is with a radical reduction in the generosity of pensions offered new public employees.

I also favor increasing the retirement age and converting from defined benefit to defined contribution plans.

Alan Gin, University of San Diego

Answer: Yes

Public pension finances have deteriorated to such an extent that the financial health of many state and local governments is threatened.

The defined-benefits approach to retirement puts a lot a strain on pension programs, particularly when the financial markets are weak. Potential solutions would include raising the age at which retirees would receive benefits and going to defined-contribution programs for new employees.