When Illinois Governor Bruce Rauner was on the campaign trail, he touted his preferred solution to the state’s pension problems: shifting new hires into a system that more resembled a 401(k) plan than a traditional pension.
The idea is commonplace and has been incorporated into dozens of state and local pension plans across the country.
Michael T. Carrigan, president of the Illinois AFL-CIO, has penned a piece lambasting the idea that 401(k)s should replace traditional pensions.
From the piece:
It’s not just basic finance, it’s common sense: A large pool of money invested by professionals will yield far greater returns than small, separate accounts managed by individuals with no professional training in finance.
So why do some think that ending Illinois’ defined benefit pension system and moving workers into privatized, 401(k)-style accounts is a good idea?
New data from the National Institute for Retirement Security shows just how much Illinois taxpayers stand to lose if we switch to privatized accounts. To provide workers with the same modest retirement benefits, traditional pensions are 48 percent less expensive than 401(k)-style plans. That’s a 48 percent savings to Illinois taxpayers.
According to NIRS, there are a few key reasons why defined benefit pensions are more cost effective:
– Pension plans enjoy higher investment returns and lower fees than individual accounts, generating a 27 percent cost savings.
– Unlike individual investors who generally enjoy high-risk, high-reward investment strategies when they’re young but switch to lower-risk portfolios that yield far lower returns as they age, pension plans can maintain a balanced portfolio that yields consistently high returns, generating an 11 percent cost savings.
– Pension plans pool longevity risk, meaning that they only have to save for the average life expectancy of a group of individuals. Workers in a 401(k) plan need an investment strategy that provides for the event that they live a longer than average life. Longevity risk pooling generates a 10 percent cost savings.
What’s more, cutting public workers’ retirement security by transitioning them to a 401(k) has its own set of unforeseen costs.
The average Illinois public employee makes a salary that is 13.5 percent less than their similarly educated counterparts in the private sector, trading front-end benefits like salary for back-end benefits like pension payments. With pension benefits gone, the state of Illinois may have to drastically increase public sector salaries or risk losing teachers, police officers, firefighters, and thousands of other critical workers.
Read the entire piece here.
Photo by TaxCredits.net