New study: Switching to 401(k)-style plans is a loser for states
Gov. Bruce Rauner and his allies in the corporate elite often claim that the only way to solve Illinois’ pension funding crisis is to switch from the defined-benefit plans used today to 401(k)-style plans that would put public employees’ hard-earned contributions in the hands of Wall Street money managers.
Since 401(k)-style plans don’t assure any fixed level of benefits, they’re already a bad choice for ensuring retirement security. A new study also shows that they’re bad for state governments, too, failing to address the funding issues supporters claim they’ll fix – and often making things worse.
Reuters reported on the study, conducted by the National Institute on Retirement Security:
The National Institute on Retirement Security (NERS), a non-profit group that has defended traditional public pensions, issued case studies on three states that switched to 401(k)-style defined contribution retirement plans.
In all three states, Alaska, West Virginia and Michigan, problematic funding gaps widened, the report said. When the changes were made, backers of the switch predicted it would solve funding problems.
Alaska tried such a change in 2006 and now stands as a cautionary tale:
In 2006, Alaska switched newly hired state workers from its two biggest traditional defined benefit plans to a defined contribution plan. Yet the funding gap doubled, from about $6 billion in 2006 to $12 billion last year, according to the state. In 2014, Alaska made a $3 billion cash infusion into the defined benefit plans to shore them up.
One problem in Alaska, critics of the switch said, was that the old pension plans still had to pay out pension benefits to workers hired before 2006, but lacked contributions from new workers.
"I voted against the change, and now the state has had to come in with a bailout. It's exactly what I said would happen," said Mike Hawker, an Alaska Republican assembleyman.
Click here to read more about the study and why switching away from pensions is bad not only for public employees, but for all taxpayers too.
