What Happened?
In 2012, San Jose passed a pension reform plan to reduce public employee pension costs so services do not have to be cut to support growing unfunded retirement and benefits costs. The mayor of San Jose recently explained why the pension reform plan is working and will continue to work.
Goal
When San Jose passed Measure B, about 70 percent of voters agreed that public pension costs should be reduced and individual employee contributions should be increased. Since the pension reform plan was approved, the changes have saved the city more than $50 million with more expected in the future.
Chuck Reed, mayor of San Jose, wrote in San Jose Mercury News that the savings generated from the pension reforms should be invested in adding new police and firefighters to further reduce crime rates across the city.
The San Jose police department has already made significant strides in reducing the rate of violent crimes to one of the lowest in the nation, despite having cut the department by 300 officers. The pension reforms will generate enough savings to start adding new officers to the ranks and support continued success in reducing crime.
Hatch’s Proposal
The Urban Institute’s Retirement Policy Center recently voiced its support of a pension reform plan introduced by Utah Senator Orin Hatch last year. The proposed strategy streamlines current pension programs by providing tools to deliver secure pension benefits.
The plan establishes the SAFE Retirement Plan platform for public employers that are state regulated, market based fixed annuity solutions offered by insurance companies. The SAFE plan features:
- Secure monthly income for employees at retirement for life
- Stable, predictable employer pension costs
- Pension plan underfunding is not possible
- Transfer of risks to life insurance industry, which is in charge of investing the assets and paying the retirement benefits
- State regulatory system protects retirement benefits
The voluntary pension plan would also create 401(k)s enabling workers to save up to $8,000 annually toward a retirement safety net.
How Bad Is It?
According to the Center for Retirement Research, the unfunded liabilities for local and state governments nationwide total between $1.4 trillion and $4 trillion, and continue to grow. Pension systems nationwide have less than 72 percent of the assets needed to cover future liabilities despite a strong stock market because:
- Modest growth in actuarially smoothed value of plan assets only grew 2 percent
- CalPERs revised its reported funded ratio from 83 percent to 70 percent
However, researchers found employers are paying a larger share of their annual required contribution, which should push the funded ratio above 80 percent in the near future. The center predicts pension plans will be at least 80 percent funded by 2017, unless public systems adopt a combined rate to discount their benefit promises.
Another study from the CRR describes the necessity of public pension systems to help employers acquire and retain high-quality workers. States and localities typically pay less than private sector employers, and must make up for that gap with generous pensions. The researchers recommend states and localities be cautious when cutting back on pension benefits which could reduce the number of high-quality job applicants to fill key roles.
Pension Strategies
Gov1 has reported on a variety of pension reform strategies, as well as changes to reduce system abuse such as pension spiking.