Pension facts in the face of false panic
(Response to Star Tribune editorial by Kim Crockett, Center of the American Experiment)
April 5, 2013
A favorite pastime of public-pension opponents is comparing Minnesota to states with big pension problems such as California. (“A public pension surprise for Minnesota?” April 4.) This comparison just doesn’t fly.
Minnesota differs from California in several ways. Minnesota passed bipartisan pension reform legislation in 2010 that required significant shared sacrifice from retirees, active public workers and public employers and has since been cited as a model for other states. Public workers have always contributed roughly half the pension cost in Minnesota, and in fact, 80 percent of the solution to our funding problems in 2010 came on the backs of public employees through benefit cuts and higher contributions.
In Minnesota, worker contributions have always been higher than average and public employer contributions lower. The average employee pension payroll deduction in Minnesota is about 6 percent. The national average: about 5 percent. (National Association of State Retirement Administrators Public Fund Survey.) The average public-employer contribution (the taxpayer portion) in Minnesota is about 6 percent, compared with a national average of 10.3 percent. Employer/taxpayer costs are only 1.6 percent of state and local government spending here, compared with 2.9 percent in other states, according to the U.S. Census Bureau.
So it is misleading for Kim Crockett of the Center of the American Experiment to use other states as indicative of what is happening in Minnesota. The Minnesota legislature has a long history of handling pension obligations in a responsible manner. The 2010 legislative reforms, combined with improved investment returns, have lowered the public pension systems’ unfunded liabilities by over $10 billion since 2009 – and will continue to generate savings going forward.
Bills now under consideration at the legislature will improve the funds’ status even more. Changes to the PERA Police and Fire plan will cut benefits by $458 million. Both retirees and active P&F members are being asked to make sacrifices, with 78 percent of the solution to the plan’s financing problems being shouldered by public workers. Similarly, changes to the MSRS State Patrol and Judges plans will reduce benefits by $35 million.
But anti-pension lobbyists have a bigger agenda: to get public employees shifted into a 401(k)-type retirement plan. The same plans that are failing private-sector workers.
Taxpayers should be very wary. First off, when a public pension plan is closed and contributions are siphoned away into private accounts, the taxpayer is on the hook for the costs of meeting the obligations of the existing pension plan. The Minnesota retirement systems’ actuary estimated that the state would incur transition costs of about $3 billion over the next 10 years if the defined-benefit plans were closed. The scenario would be similar to what happened when the Minneapolis Police & Fire plan was closed to new members in 1980 and the Minneapolis Employees Retirement Fund closed in 1978. Only much bigger.
Second, taxpayer costs would shift to the areas of state government that deal with poverty issues: public assistance and nursing home costs. The retirement crisis in this country is in full swing, with far too many Americans hitting their retirement years and finding that their 401(k) savings are nowhere near enough to sustain them as they age. Those who are able to continue working are doing so. Those who are not must try to make ends meet on Social Security. If they can’t, they turn to taxpayer-funded public assistance.
We as a society need to ask ourselves some tough questions. Do we want to make a half-million Minnesota public employees less income-secure in retirement? How will that benefit our state? How does it benefit private-sector workers if we throw Minnesota’s public employees into a flawed, inadequate retirement system such as the 401(k)?
Minnesota deserves less free-floating panic and more focus on the big picture and what kind of state we want to live in.
Mary Vanek, Executive Director, PERA
Dave Bergstrom, Executive Director, MSRS
Laurie Hacking, Executive Director, TRA