Reason Foundation

http://www.reason.org
http://www.reason.org/news/show/401k-plans-and-requiring-voter

Reason Foundation

401(k) Plans and Requiring Voter Approval for Future Benefit Increases Can Slow Pension Crisis

Study shows how and why unfunded pension liabilities have skyrocketed, offers solutions

June 16, 2005

Los Angeles (June 16, 2005) — Illinois has an unfunded pension liability of $35 billion dollars. The California State Teachers' Retirement System faces a $24 billion unfunded pension liability. Los Angeles County's pension shortfall is $5.6 billion and West Virginia's pension deficit is $5.5 billion. Cities like San Diego, Houston, and Detroit all have unfunded pension liabilities of more than $1 billion. And the list goes on and on.

With taxpayers across the country facing the daunting likelihood that they'll be required to bailout government pension systems a new Reason Foundation study urges all governments to shift new employees to 401(k)-style defined-contribution plans and to pass laws requiring voter approval for any future benefit increases. The study concludes that traditional government retirement plans encourage irresponsible decision-making and chronic under-funding, allowing politicians to curry favor with unions by doling out excessive benefit increases at taxpayer expense.

"Our pension system is a minefield of flawed incentives," said George Passantino, senior fellow at Reason Foundation and lead author of the study. "At the heart of the pension crisis is a set of incentives encouraging policymakers to make promises for which they do not have to bear the consequences. Since lawmakers and union officials will not bear the costs of the benefit increases they preside over, there is no incentive for them to show restraint or to be fiscally responsible. Shifting new employees to 401(k) plans will stabilize costs and eliminate the ability of politicians to hand out costly benefit increases as political favors. When lawmakers approve benefit increases they are committing taxpayers to a long-term obligation. As such, any increase to pension benefits should be subject to a vote, just like a general obligation bond would be."

"Private-sector companies attract top talent with 401(k) plans, and governments can too. The defined-contribution plan simply requires that pension costs be dealt with in the current year," stated Adam Summers, a policy analyst at Reason Foundation and co-author of the report. "Defined-contribution plans offer more stability, transparency, and remove political influence from the retirement process. They also give employees greater investment choices and flexibility."

The Reason study says governments should re-evaluate employee retirement ages; use long-term averaging to minimize volatile swings in the market; avoid pension obligation bonds, but if bonds are issued, impose additional assessments on government employees to speed bond repayment; and limit vacation time sell-back programs.

The Reason report includes several case studies showing the underlying causes of the pension crisis and how so many governments — from Los Angeles to San Diego to Houston to Detroit — have amassed billions in unfunded pension liabilities.

Full Study Online

The full study, The Gathering Pension Storm: How Government Pension Plans are Breaking the Bank and Strategies for Reform, is available online at www.reason.org/ps335.pdf. A summary of the report is available at www.reason.org/ps335polsum.pdf.

About Reason

Reason Foundation is a nonprofit think tank dedicated to advancing free minds and free markets. Reason produces respected public policy research on a variety of issues and publishes the critically acclaimed monthly magazine, Reason.

Contacts

George Passantino, Senior Fellow, Reason Foundation, (661) 466-3694
Adam Summers, Policy Analyst, Reason Foundation, (858) 204-7363
Adrian Moore, Vice President of Research, Reason Foundation, (661) 477-3107
Chris Mitchell, Media Relations, Reason Foundation, (310) 367-6109



Print This