As with Cars, a Hybrid Pension Will Cost More
My second pension post on the RI Center for Freedom & Prosperity site points out that the anticipated per-employee cost of the hybrid system will actually be higher than the price that taxpayers are currently being given for pensions.
Excellent analysis on both your pension discussions. You ask some important questions that haven’t been looked yet.
Justin –
I couldn’t figure out how to comment on your post on the RICFP site, so I am doing so here.
While you are correct that the ‘normal’ cost will be a bit higher once the liability is paid down, there are a couple of factors to keep in mind:
As of right now, as a percentage of payroll, the state has to put in 23% of state payroll to fund the state retirement system. If left unaddressed, the number skyrockets to 36% next year, and then 41% ten years out.
We have to do something to keep the state finances from blowing up.
Additionally, that extra two percentage points in increased cost reduces the State’s exposure to the stock market by 50%! That is a substantial return on the 2 percent additional investment.
The proposed pension reform solves a massive liability problem while keeping the taxpayer’s contribution fairly fixed for the duration of the debt paydown. Additionally, when everything is said and done, the State will have vastly reduced market exposure and a nationally competitive plan.
While I admit that there will always be things that can be changed in a bill as complex and large as this one, I must say that all things considered this bill solves a very tricky problem.
I’m not sure that any plan other than bankruptcy stands a chance of passing legal muster and extracting RI from this fiscal crisis.
After reading my last sentence I want to re-phrase:
I’m not sure that any plan other than the currently proposed reform or bankruptcy stands a chance of passing legal muster and extracting RI from this fiscal crisis.
My understanding is that commenting is a soon-to-be-available feature over there. In the meantime…
Ken,
I’m certainly not arguing that the pension system shouldn’t move away from guaranteed benefits and thereby reduce exposure to risk — whether market risk, political risk, or faulty assumption risk. However, as my associated pie charts illustrate, the hybrid plan is more expensive than the existing plan, at least on paper.
It may be worth the cost, if it’s necessary in order to sell the change to specific constituencies, but it ought to be a conscious decision. That’s especially true because the short-term savings in the reform necessarily come entirely from the reworking of benefits in the current system (COLA, retirement age, etc.), which are going to be subject to hot debate and eventual dilution. Taxpayers should not think that giving in on the liability side of the ledger is justified by savings on the hybrid side.
That said, there’s another very large problem with your argument: If it is worth tens, even hundreds, of millions of dollars per year in order to buy our way out of market exposure, it’s also very likely that the assumptions behind the reform are deeply flawed. After all, by Raimondo’s estimate, the system won’t be fully funded until 2035. If further reforms turn out to be likely (which I’d wager that they will), the 5% that employees are contributing and the 1% that taxpayers are contributing to defined contribution plans will not be available in any scheme for further repairs.