No Pension, No Security: Abandoning Defined Benefits is Both an Over Reaction and Bad Public Policy

Note: This article first appeared in Citizens League Voice magazine.

Remember the Chicken Little fable? Just like the chicken who believed the world was coming to an end, some politicians and researchers are provoking unreasonable fear about the health of Minnesota’s public pension funds.

Teachers and government workers have deferred their wages for a guaranteed pension that allows them to retire with dignity. Yet their retirement security is continually under attack by conservative organizations, whose stated intent is to transition pension plans into defined contribution plans.

Benefits Are Better Than Contributions.

Today, most public workers in Minnesota have a modest defined benefit pension of some $21,000 a year, guaranteed no matter what happens in the stock market or how long they live after retirement. In many cases, this money, combined with Social Security, is the difference between dignity and the ravages of poverty.

Not all workers are so fortunate. Nearly a million Minnesotans don’t have access to a retirement plan at work. One in every seven Minnesotans age 65 and older lives in poverty while relying only on Social Security. The typical working-age household has only $3,000 in retirement assets, while near-retirement households have only $12,000.

Under a defined contribution plan, loyal and essential public workers would lose their guaranteed retirement income. Their savings would be subject to investment risk and their future income would depend on their ability to save. As with a 401(k), most retirees would see their savings run out before they die.

Pension Envy.

We’ve seen the playbook on pension envy. Wall Street works to convince young people that pensions are for a bygone generation, pitting them against older workers while pitching the benefits of portable 401(k)s, which seem attractive to those just entering the workforce. What goes unsaid is that when it comes to retirement security, nothing beats a real pension. There’s nothing “old school” about retiring with dignity and defined benefits that last a lifetime.

Healthy Pensions. 

Eliminating defined benefit pensions has become trendy for corporate giants, and now it’s becoming fashionable for government. So far, Minnesota has resisted the trend, largely because our system—contrary to the fear mongering headlines—is in good shape.

Minnesota’s three public pensions—Minnesota State Retirement System (MSRS), Public Employees Retirement Association (PERA), and Teachers Retirement Association (TRA)—are all well managed and have $64 billion in assets. Today, according to Retirement Systems of Minnesota, MSRS is 81.5 percent funded, PERA is 78 percent funded, and TRA is 77.5 percent funded.

Even more important—and what’s often overlooked by anti-tax forces—Minnesota taxpayers as a whole pay only 14 cents of every dollar of public pension benefits; the remaining 86 cents comes from employee contributions and investment returns. Most private pensions are 100 percent employer paid.

Economic Engine.

Every dollar that Minnesota taxpayers invest in public pensions pays off with $9.98 in economic activity across the state, according to Pensionomics 2016, a report by the National Institute on Retirement Security.

Pension spending keeps Main Street businesses open, especially in Greater Minnesota. In Stearns County, for example, there are 5,151 retirees with $106 million of annual pension benefits, according to the Minnesota Public Pensions Systems. An estimated 90 percent of retired public workers stay in Minnesota and spend their pension checks on local goods and services. They purchase food, clothing, and medicine at local stores, pay housing costs, and make larger purchases, like a car or laptop. These purchases create a steady ripple effect that directly supports 41,839 jobs and $2 billion in wages in Minnesota.

Public-sector retirees also paid $499 million in federal, state, and local taxes directly out of their pension benefits in 2016.

Shared Sacrifice.

There’s also been a longstanding spirit of shared responsibility to stabilize state and local government pension funds when the system requires an adjustment.

While it’s sometimes been painful, government workers have supported every comprehensive pension reform over the last decade. In 2010, for example, they fixed a $4 billion funding gap by increasing their employee contributions and capping benefit increases. These sorts of reforms, coupled with strong investment returns, have stabilized Minnesota’s pension funds.

Living Longer.

It’s true that state employees, teachers, and retirees have a life expectancy that is two years longer on average. This is not a reason to panic or abandon a system that has worked for generations, however. The challenge is to offset up to an additional $1.4 billion in future liabilities.

Unions that represent government employees recognize this. To cite just one example, AFSCME Council 5, the largest union of active and retired state employees, supports a combination of sustainability measures to keep pension funds sound. They’ve endorsed an MSRS proposal to raise employee contributions from 5.5 to 6 percent, raise employer contributions from 5.5 to 7 percent, and reduce the cost-of-living adjustment from 2 to 1.75 percent. Those measures alone would save $400 million.

We’re Different Here.

In Minnesota, our public pension systems are healthy and well managed. There’s no reason to fix what isn’t broken. We have had a budget surplus for most of Governor Dayton’s tenure. In 2017, USA Today ranked Minnesota the nation’s best-run state, and the AARP called it the best place to retire.

We should oppose any attempt to transition secure pensions into risky savings plans. That would hurt Minnesota’s economy and undermine our state as the best place to grow old.

Instead, policymakers should work in partnership with the pension systems and unions that represent public workers. Together, we can all strengthen our already stable pension funds without breaking the bank or burdening retirees and taxpayers.