Publicly run pensions will invite trouble

Guest Editorial
This editorial is reprinted from USA Today, where it was first published.
If worrying about government debt, the sluggish economy and high gas prices weren’t enough, consider this: America is facing a retirement crisis. According to the Center for Retirement Research at Boston College, 51 percent of households are at risk of not having enough money to retire. That’s up from 31 percent in the early 1980s.

The reasons are easy to spot. Traditional pensions are rapidly disappearing and are being replaced by 401(k)s. Such plans provide more flexibility to employer and employee alike. But many workers find 401(k)s perplexing and too easy to ignore, underfund or raid for more immediate needs. Few are smart investors. They make bad decisions that lower the value of their retirement accounts.

Now comes a proposed solution from government leaders in California, Rhode Island and New York City, among other places. They want to open state and metropolitan pension plans to employees at private companies. The idea is to create an idiot-proof, low-cost retirement plan run by top-flight managers.

These plans would not be pure “defined-benefit” pensions that pay fixed amounts based on number of years worked. Nor would they be pure “defined-contribution” plans like 401(k)s, which are based on money paid in plus market returns. Rather, they would be hybrids — based on what an employee (and employer if it participates) contributes, but with the state guaranteeing an annual rate of return.

The people behind this idea mean well. But they have come up with a plan that invites all sorts of political manipulation. States have a terrible track record with their public employee plans, which have left taxpayers with huge liabilities because lawmakers granted overly generous benefits. California, for example, has a $500 billion shortfall in its three major state pensions.

Lawmakers pumped up pensions because government workers are a powerful constituency that knows how to get what it wants. When the economy was strong, government workers lobbied for better benefits, which were sold to the public by labor-friendly pension managers armed with unrealistic predictions of investment returns.

It’s not hard to imagine the participants in these new pension plans doing the same. They might ask for higher guaranteed returns, or perhaps public contributions to their funds. They might even lobby to have their funds turned into defined benefit plans. Politicians, looking no further ahead than the next election, would comply.

What’s more, these new funds would add more opportunity for corruption. Multibillion-dollar public employee funds have been rife with “pay-to-play” scandals, in which money managers bribe politicians to get a piece of the action in managing state employee assets. Alan Hevesi, a former comptroller of New York, pleaded guilty to corruption charges in such a scheme.

Rather than create a new retirement system, lawmakers should bolster the one in place.

One good idea is to make participation in 401(k)s subject to automatic enrollment, forcing workers to “opt out” rather than requiring them to “opt in.” Another option might be to bring back former President George W. Bush’s idea of private Social Security accounts, but make them a supplement to the traditional program rather than a partial replacement for it — an idea that has sometimes drawn support from both left and right.

To address the issue of workers not knowing how to invest, so-called life-cycle mutual funds, which remove much of the guesswork, are an obvious solution.

Giant new publicly run pensions are not the answer. They might help solve one problem — the difficulties many Americans have in saving enough for retirement — but they would create a whole lot more.