The following is a letter by Hank Kim (NCPERS):
Andrew Biggs misses the point in “Pension Reform Doesn’t Mean Higher Taxes” (op-ed, March 26). His arguments for switching public employees from traditional defined-benefit pension plans to 401(k) and other defined-contribution plans may be embraced by state and local governments that regularly don’t make required contributions to their pension plans and are now looking for a way out of the financial hole they’ve dug for themselves. It’s bad enough that he dismisses the very real out-of-pocket costs of transitioning from a defined-benefit to a defined-contribution plan as just so much smoke. But he omits the biggest, well-documented impacts of such a switch: higher costs and lower retirement benefits for employees.
Defined-benefit pensions pool investment and longevity risks across generations of taxpayers and employees. Their professionally managed investments cost less because of economies of scale and significantly out perform defined-contribution investments. Defined-contribution plans have a pool of one—the individual account holder, who typically has little investment acumen, a limited number of investment options and pays investment costs typically double those of a defined-benefit plan. Study after study shows that for the same contribution by the employer, defined-contribution plans provide benefits from 20% to 35% lower than a defined-benefit plan.
Millions of workers retiring with lower benefits won’t help the economy and could become a burden on taxpayers. The short-term fix that Mr. Biggs is advocating not only won’t save any money now, it could easily create a much bigger problem for state and local governments in the not-too-distant future.
National Conference on Public Employee Retirement Systems
Source: The Wall Street Journal