Illinois Union President: Taxpayers Would Lose With Switch to 401(k)

401k jar

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.


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What Would Adam Smith Say About CalPERS’ Hedge Fund Pullback?

Adam Smith

Tim Worstall has written an interesting piece for Forbes in the wake of CalPERS’ decision to remove $4 billion from 30 different hedge funds. The premise: What would Adam Smith think about the pension fund’s decision to end its investments with hedge funds?

Worstall writes:

We can look back all the way to 1776 and the foundation text of modern economics, Adam Smith’s “Wealth of Nations” and find a reasonable explanation of what’s happening here. Essentially, hedge funds were a great idea but the innate structure of free market capitalism means that no idea stays great over time.


When the capitalists (investors) spot someone making those above average profits then they’ll move their investments over into that sector so that they can get them some of those excess returns. All of which is entirely fine and is a reasonable enough description of what happened to hedge funds from their small start in the 60s and 70s up to recent times. They were making higher (risk-adjusted) profits and people were moving more of their capital into them in order to get those higher returns.

However, Smith goes on to point out what happens next. That increased capital in that sector introduces more competition into that sector. Such competition, umm, competes away those excess profits and it’s thus, in the end, the very movement of capital (or investment) in chase of higher returns that leads to the higher returns disappearing. This would be a reasonable description of the hedge fund industry in more recent times.

Certainly, some funds have done very well indeed, but others have tanked. The average return from the industry (after fees, a vital point to consider) is now lower than many if not most other investment strategies. At which point we should see capital flowing out of the industry and that’s just what Calpers is doing.

Worstall is a senior fellow at the Adam Smith Institute. Read the rest of his piece here.


Photo credit: “AdamSmith” by Etching created by Cadell and Davies (1811), John Horsburgh (1828) or R.C. Bell (1872). Licensed under Public domain via Wikimedia Commons