401k(illed)

broken-nest-egg

The San Diego County Taxpayers Association has released a new report showing that the increased city pension costs across the county are resulting in increased taxes.

The report provides a good summary of the various pension plans and obligations distributed amongst the county’s 17 municipalities. The report is also thick with suggestions to cut pension costs. The only thing the report lacks is empirical proof of its basic thesis: that pension costs are driving tax increases in specific instances. In other words, the report is long on supposition but short on validation.

But man, is it long on recommendations.

The SDCTA’s argument is essentially reducible to the claim that, because pension costs impact cities’ finances and some cities have raised sales taxes, pension costs are the causal factor. Now, I do not doubt that the SDCTA is right in its basic conclusion that pension costs are a contributing factor in a number of cities increasing sales taxes in recent years. But pension costs are just that: a contributing factor. Declining property tax revenues, Sacramento revenue clawbacks, increased operational costs—like health-care benefits—and increased spending mandates are also contributing factors. The report does not state just how big an impact pension pressures have had on tax hike decisions. Indeed, the report provides no empirical statistical evidence in support of the initial hypothesis except a simple association: Since cities have high pension costs and cities have raised taxes, the tax increases are caused by the pension costs. This may be true (again, I think, to a degree, it is). But it may be a fallacy of false causes. There isn’t a Chi Square or a Pearson’s R—let alone a Yule’s Q—worth of real numbers in the report to validate what is left as ultimately a subjective analysis, let alone justify the sweeping changes to municipal pension plans the SDCTA offers as remedy.

The SDCTA  initially argues in the report that pension plans need be reformed because they are leading to higher taxes (again, a claim unsubstantiated). However, the bulk of the report’s recommendations focus not on a fiscal-efficacy argument but, instead, on a fairness argument which the purported analysis did not address. Stripped of its fiscal-impact component, SDCTA’s argument for pension reform  is reducible to this:

It’s unfair that municipal-worker pensions are better than those of most private-sector workers, therefore the defined-benefit plans most municipal workers have should be replaced with the defined-contribution plans (401k) that most private workers have.

Oh, really? One could just as easily reverse the argument saying it’s unfair that municipal-worker pensions are better than those of most private-sector workers, therefore the defined contribution plans (401k) that most private workers have should be replaced with the defined-benefit plans most municipal workers have.

Why punish municipal workers by taking away the pension plans they were promised—and worked faithfully in exchange for?  Why not improve the retirement plans most private employees have, instead?

Oh, right. We used to do that, back in the days when labor-union membership was stronger, government regulations were tighter and American workers of all stripes—blue collar or white, labor or management—fresh from ending a depression and winning a world war demanded of their employers and government that they be treated with a little (cue Aretha Franklin)  R*E*S*P*E*C*T.  The American post-war social compact was clear: If American workers work hard, they will, in cooperation with the companies they labor for  and the government they vote for, achieve the security of retirement. As a result, more and more workers were protected not only by the safety net of Social Security, but by the guarantee of defined-benefit private retirement plans.

Geez, they were such Mad Men back then.

Over the last generation, corporations (and I’m not bashing them—corporate owners and managers simply did what society and government allowed them to do, so we are all in this together, Mr. Moore), freed of government regulation and the post-war sense of public obligation, shed their defined-benefit plans even faster than they shed American workers. Now the only real vestige of the past golden age of guaranteed retirement is, for the most part, government workers.  No wonder business and capital groups across America would like to see such municipal plans go away: Once defined-benefit plans are banished everywhere in the realm even the concept of them will Orwellianly disappear from the public discourse.

And by the way, one of my beefs about the SDCTA is that it is, ultimately, much more of a business/capital group than a worker/labor group, even though workers—including labor union members—pay a fair hunk of taxes.  Of course, wealthy people pay far more in terms of most taxes than poorer workers do. Hmmm, now just what set of taxpayers does the SDCTA gravitate towards?  The proof of the pudding is in the analyzing, as my pop the chemist used to say. The SDCTA report states:

As one typical example, the report shows that a city administrator with 30 years of service earning $75,000 at the peak of her career would receive an annual pension of $72,900 plus yearly cost of living increases. An equivalent benefit for an employee in the private sector retiring at age 60 would require an individual to have an IRA, 401k or other pension account worth more than $1.8 million.

True dat. But what should really grab attention is not that the city employee with the defined-benefit plan will get 97 percent of their base pay in retirement.  The real shocker is that to get anything near that, an average worker would need squirrel away at least $15k-$30k or more a year for their entire working life to get a good pension—and then pray that they aren’t hit with a Dot.com or Wall Street Meltdown that reduces their 401k to financial road-kill just as they plan to check out.

Now, are some of the negotiated benefits city workers get too generous? Perhaps.  Retirement ages, most certainly, need be looked at. (And not just for municipal workers. If life expectancy is growing, the expectation that people need work longer before retiring needs be considered for all retirement systems, including social security.) But the SDCTA report is a less a real analysis of tax policy and pension plans than a wish-list for those dedicated to the proposition that the only good defined-benefit retirement plan is a dead defined-benefit retirement plan.

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5 Responses to “401k(illed)”

  1. getreal Says:

    Luna – Did you actually read the report? I scanned it and didn’t read anywhere that the group recommends doing away with defined benefit retirement plans for 401ks.

  2. Carl Luna Says:

    “There can be no definition of a ‘fair’ that taxpayers pay the entire cost with employees contributing nothing. That doesn’t happen with Social Security or with private pensions, and it shouldn’t happen with city employees, either.” Lani Lutar, SDCTA October 7 Report, page 2.

    Moving from employer provided to employee funded pension systems is what has essentially happened over the past 30 years in private plans–401ks–which, once upon a time, treated employee pensions as additional compensation over and above base pay. Arguing for employees hired under the current defined benefit plan to now take base pay to supplement the plan is a backdoor way of asking for a pay cut–unless the value of current pension pay-ins by the city is, instead, paid directly to employees as current salary. And how would employees “contribute” to their plans? 401ks.
    Lunacy

  3. CJ Says:

    You are absolutely wrong! What the report is stating is that employees should actually contribute to their Defined Benefit plan, AS OPPOSED to the agency picking up their contribution on their behalf. It is still a DB plan but they are instread having the employee contribute something, as is required by law. It seems to me you may want to ask Ms. Lutar for a lesson in public pensions.

  4. Lani Lutar Says:

    Dear Professor Luna:

    Thank you for highlighting our report in your blog. We welcome dialogue and debate on public pensions at any time, especially with those that disagree with our viewpoint.

    Please allow me to clarify a few inaccurate statements in your post.

    “The only thing the report lacks is empirical proof of its basic thesis: that pension costs are driving tax increases in specific instances.”

    If you read my quote in Calpensions (www.calpensions.com) I clearly communicate that pensions are not the only factor contributing to sales tax increase proposals. In both our press release and the pension report, we “link” pension costs and efforts to increase taxes. This is an observation—and nowhere in either document does it state that pension costs alone cause tax increases.

    I will concede that we were comfortable highlighting the link between pension costs and tax increases because of fact-based knowledge from time series analysis we conducted in recent years for the cities with the highest pensions costs including El Cajon, La Mesa, National City and Chula Vista (all available on our website). We should’ve communicated this historical background more clearly within our report.

    You also note our report is long on recommendations.

    Actually, we have only two simple recommendations:
    1. Cities should stop picking up the employees’ share of pension contributions.
    2. Retirement benefit formulas should be reduced for new hires.

    We never state anywhere in the report that defined benefit plans should be replaced with defined contribution plans (401k). And please stop putting words in our mouth: We do not claim that vested retirement benefits should be taken away from municipal workers.

    You can argue that asking employees to contribute to their defined benefit plan is a backdoor way of asking for a pay cut. That is true. However, let me point you to page 26 and 28 of our report which debunks your notion that the only way public employees can contribute to their pension plans is via a 401k.

    The purpose of our report is to shed light on the generous benefits and significant costs of public pensions provided to municipal employees. When pension costs alone consume 10% or more of a city’s general fund, everyone – city workers included – should be concerned about sustainability and solvency. An insolvent city or city on the brink of bankruptcy hurts communities and public workers.

    Another important point you miss is that the majority of public workers contribute little to nothing toward their pensions and their retirement pay is boosted as a result of this practice. Rather than earning a $67,500 annual pension from a 3% @ age 60 formula in the example of a city administrator with 30 years of service, the employee would get an 8% increase in annual pension payments – or $72,900 – because they’re contributing nothing toward their retirement. Yes, you’re reading this correctly. In a bizarre twist, the less an employee pays into their CalPERS plan, the greater the benefit they receive upon retirement. Now that is lunacy.

    Sincerely,

    Lani Lutar
    President & CEO
    San Diego County Taxpayers Association

  5. Doing The Half-Latella « Political Lunacy Says:

    […] blog.  The Dean of San Diego Tax Dissers (that’s right, only Deputy Dean Dick Ryder) wrote a comment on my blog about the SDCTA municipal pension plan report–401k(illed)–in her usual […]


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