Imagine that your bank advised you to refinance your mortgage. Except that instead of enjoying lower monthly payments and reducing the debt on your home, your mortgage payments will increase and your overall debt will skyrocket.
That’s a bit like the conversation that lawmakers in Carson City are having over the future of the Nevada Public Employees Retirement System, the mechanism by which the Silver State’s teachers, firefighters, police officers and other employees earn a modest, but secure retirement benefit.
The Nevada pension plan for state and local workers is among the best-governed and well-designed plans in the nation. Like many funds, PERS suffered after the Great Recession. But thanks to changes made in 2010 and an overall commitment by the Legislature to make annually required pension contributions, PERS today is funded at 71 percent — and is on the road toward 100 percent funding over the next 30 years.
Yet Nevada lawmakers are considering closing Nevada PERS in favor of a “stacked hybrid” retirement plan that has the potential to increase—rather than reduce— overall costs and liabilities.
A hybrid plan works like this: Up to a certain salary, an employee’s retirement will be covered by a traditional defined benefit pension plan. Anything above that salary threshold will be covered by a defined contribution plan, similar to a 401(k)-style plan. It seems simple, but freezing the current pension plan and moving to any kind of system with a 401(k) component introduces a host of problems.
First, 401(k) plans are more expensive for taxpayers than a defined benefit pension. That’s because a large pool of money invested by financial experts yields far greater returns than small, separate accounts managed by individuals with no professional financial training.
Further, opening a 401(k) system drains contributions from the traditional pension system, increasing overall debt. Think of it like a credit card. Just because you open a new credit card doesn’t mean that the debt on the old card goes away. And if you fail to make payments on the old card, interest will cause your debt to spiral out of control. Not surprisingly, a recent fiscal analysis estimates transition to a hybrid system in Nevada could cost more than $800 million.
Second, 401(k) plans do a poor job of managing Nevada’s most important resource — its workers. Pension plans attract and retain valuable, loyal employees. On the other hand, 401(k) plans encourage high rates of turnover, an extraordinary financial burden for state and local governments.
Finally, a 401(k) plan will devastate the retirement security of public workers. The Nevada hybrid proposal has the potential to cut retirement earnings by more than 50 percent. Given that Nevada public employees do not earn Social Security, this move could force future retirees into social welfare programs — another unforeseen cost.
These aren’t theoretical arguments. States that have experimented with a transition to 401(k)-style systems have exacerbated rather than solved their debt problems. Michigan started enrolling all new state employees in a 401(k)-type plan in 1997. The system’s unfunded liabilities increased from $697 million in 1997 to $4.1 billion 13 years later. Alaska’s story is similar. Its 401(k)-type plan for new state and public school employees began in 2006. By 2013, the lawmakers’ changes doubled Alaska’s pension debt to $12.4 billion.
In West Virginia, the situation was so bad that lawmakers chose to reopen its defined benefit pension system. The switch back vastly improved the health of the system. It is now funded at 59 percent rather than 18 percent.
Given the mounting evidence, Nevada should think twice before making a foolhardy switch away from its traditional retirement system. Instead, the Legislature should build on the practices that make PERS a model for the nation, preserving retirement security for generations to come.
Source: Las Vegas Review-Journal