Opinion: ‘Don’t rush into drastic plan change’s

Read this letter to the editor written by Kirk Blair, who retired from the Bakersfield Fire Department in 2007.
Published in Bakersfield.com on Jan. 31, 2011.

There’s been a lot of discussion about the current problems with pensions. I think it’s universally accepted that pension plans need to be modified. But when I hear proposals to eliminate pensions and switch to individual “defined contribution” 401(k)-type retirement plans, I can’t help but think of the old saying “Those that don’t know the past are destined to repeat it.”

One doesn’t have to go back in history very far to see how well individuals planned for old age and retirement. Basically, they didn’t. Those that could no longer work often became a burden on their families or society. What evidence does anyone have to suggest human nature has changed?

The idea of a large group of people, along with their employers, investing funds so they could be shared in retirement is appealing. The principle of being able to guarantee a “defined benefit” for life is simply due to the fact that some of us won’t make the average life span found in an actuarial while others will live past it. Proponents of individual retirement plans will espouse the virtue of leaving your savings to your family should you die early. But they downplay the more likely scenario of outliving your savings. How does an individual really plan, with any certainty, the necessary amount of savings for their particular life span? The real problem is not only how bad public-sector pension plans are funded, but how bad private-sector retirement plans are funded.

We are in uncharted territory concerning 401(k) plans. They have been around for less than 30 years, and we’ve not yet had a generation of workers retire on all or mostly 401(k) assets. The sad fact is that as bad as the pension situation is, most personal 401(k) plans have done worse. Studies have shown individual plans have less investment, more stock/risk exposure and higher administrative/management costs than pensions.

So where did pensions go wrong? I know it’s easy to point at one culprit (labor) and demonize them, but it’s more complex than that. A more rational explanation may be had from the watchdogs at Calpensions.com. Here are some excerpts:

Proposition 21 in 1984 allowed public pension funds to shift most of their investments from predictable bonds to stocks and other investments, with higher yields but also higher risks

In fiscal 1981, CalPERS received $496 million from members, $1.36 billion from employers and $1.46 billion from investment earnings. By fiscal 1997, two years before the SB 400 benefit increase, CalPERS received $1.4 billion from members, $2.3 billion from employers and $23.5 billion from investment earnings.

CalPERS had strong investment earnings, 20 percent in 1997 and 1998 and an average of 13.5 percent during the previous 10 years. The part of the pension fund covering most state workers had a funding level of 110.7 percent.

CalPERS sponsored legislation authorizing a major trend-setting pension increase when it had a surplus in 1999, famously telling legislators that state costs would not rise above the previous year’s rate for a decade.

The powerful CalPERS board, which sets employer contribution rates, had given the state a contribution “holiday.” State payments that had been $1.2 billion in fiscal years 1996 and 1997 were dropped to $159 million in 1999 and $157 million in 2000 (employees continued their contributions of 5 percent to 7 percent).

SB 400 sailed through the Legislature with little debate or opposition, passing the Senate on a 39-0 vote and the Assembly 70-7.

The stock market fell soon after SB 400 passed. By 2004, the state CalPERS contribution was $2.5 billion.

Even with the previous pension plan, CalPERS’s decision for “holidays” in employer contributions during the good times and the other “expert investments” would likely have put state pensions in a negative place. Politicians were quick to condemn CalPERS for being overfunded in the past. Do you remember Gov. Pete Wilson wanting to raid the pension to pay state obligations?

Now they’re squawking because it’s underfunded. Not contributing when times were good (and overfunding the account) created inevitable losses when things went south. We’re talking basic income averaging.

So, let’s not rush into drastic retirement plan changes that will likely result in the continued downward spiral for the middle class.

Kirk Blair of Bakersfield retired from the Bakersfield Fire Department in 2007.

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