Working Towards Pension Enlightenment

In his Monday tip-sheet, Ian Donnis of WRNI (1290AM) reviewed some of the details coming from the second meeting of State Treasurer Gina Raimondo’s “pension advisory panel”. The second item from the post includes a quote from panel member Robert Walsh, Executive Director of the Rhode Island chapter of the National Education Association…

The math is still the math. A defined benefit pension system is still the most affordable way to provide retirement security.
But in any meaningful fiscal sense, “affordability” is a dubious choice of criterion for describing the advantages of a defined benefit retirement system. Defined benefit plans differ from defined contribution plans in the assumption that DB plans have access an outside pool of money that they can draw upon at will, in order to pay a guaranteed benefit level. That pool of money doesn’t appear “for free” — it is part of the pension costs to the taxpayers.
Both types of plans depend on the investment growth of money in the plan. So why should defined benefit plans be assumed to be more “affordable” than a defined contribution plans? Is it that funds in a DB plan should be assumed to grow faster than the funds in a collection of DC accounts? The presenter at last week’s Providence Republican City Committee’s pension forum, Gary Morse, suggested that this is not automatically valid…
If you had invested in a balanced portfolio, when you came in as a teacher in 1980, you would have outperformed the investment rate that you got from the state.
Perhaps there an assumption being made that poor choices by a collection of individual DC investors will depress the ideal rate of return. OK, that assumption could be built into a forecast — but then, to be fair, you have to consider that “managers” (both financial and political) of a DB pension system will make non-ideal choices too. In fact, several generations of DB system “managers” have combined to make decisions that have been so bad, they have brought the system to the brink of collapse. So, if the idea that individuals allowed to invest their own retirement money will make bad decisions is going to built into the analysis of DC plan, then doesn’t the potential — and the reality, by the way — of bad decisions of the kind that can and have put the current system on the path to bankruptcy have to be considered in the analysis of DB plans?
(And all of this still doesn’t begin to address the problem of retirement security for people who want to change jobs and/or careers during their lifetimes. Shouldn’t people who don’t decide on the career until later in life, or who actively choose to try a few careers over their working lifetimes, have the same shot at a decent retirement as those who decide early on what it is they want to do for the next 30 years?)
Finally, Robert Walsh offered other interesting remarks to Ian Donnis…
Well, certainly we’re going to have to bring them [on the other side] into enlightenment…
I think that folks like [Mayor Allan Fung] and some of the city and town leaders are going to come around to understanding that things like re-amortization have to be part of the final answer here because so much of the problem is the unfunded liability.
A positive relationship between reamortization and enlightenment is difficult to establish, however. Reamortization is the passing the costs of mistakes made by past generations on to future generations. That is not enlightenment — enlightenment begins with cleaning up our own mistakes, and passing as clean a slate as it possible to the next generation. We cannot achieve that, by forcing people yet to be born to pay for our screw-ups, at a time when they will be working hard to make lives of their own.
Ted Nesi of WPRI-TV (CBS 12) also has a report on the meeting, available here.

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Mike Cappelli
Mike Cappelli
10 years ago

When Bob Walsh is on any committee to “fix” the pension problem you know the entire thing is a charade.
Stick a fork in this state – it is fu@&ed!

Dan
Dan
10 years ago

Listening to Bob Walsh talk about how to fix the pension system is like listening to Arnold Rothstein talk about how to fix professional baseball after the White Sox scandal.

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