Assemblyman Michael Allen says pension reform is “a work in progress,” with additional steps potentially including a hybrid system that shifts some of the risk for investment losses from taxpayers to public employees.
Gov. Jerry Brown included the hybrid model in his reform proposal, calling for something resembling a 401(k) to go along with reduced pension guarantees. In a telephone interview with The Press Democrat’s editorial board, Allen said it was Brown who opted to leave it out of the package presented to the Legislature on Friday. Federal employees have had a hybrid retirement system since 1986, and the federal pension system isn’t experiencing the shortfalls and unfunded liabilities plaguing state and local retirement programs. “We could revisit the issue at a later date,” Allen said.
In fact, he implied that it was likely. He said cities and counties are concerned that the pension cap included in the state legislation might make it harder to recruit people, especially at the upper end of the pay scale, and that a 401(k)-type benefit might be an incentive. He said several factors made it difficult to work out in the negotiations between Brown and legislator, including the fact that some public employees are eligible for Social Security and some are not. Allen, who was recently appointed chairman of the committee that handles pension issues, said the lobbying groups for cities and counties will be invited to offer suggestions for a hybrid system.
Allen says the most important feature of the reform plan is the “hard cap,” which limits the amount of income that can be counted toward pension benefits. The result will be to keep most pensions below $100,000 a year. However, fewer than 5 percent of public employees will be affected.
I still think the state should adopt a system modeled on federal employee retirement. At age 60, they are eligible for a pension equal to 1 percent of salary for every year of service, with a small bump for working until they’re 62 (compared to 2.5 percent at 67 under California’s reform plan). They pay into and collect Social Security, putting them on par with private sector workers. And they have a 401(k)-style account, with taxpayers contributing 1 percent of pay and employees augmenting it.
Together, the three legs provide a pension worth about two-thirds of an employee’s salary (presumably we’ve all saved a bit and paid off major expenses like kids and mortgages before retiring). The pension portion is guarantee, meaning taxpayers make up the difference for stock losses. The savings plan, like a 401(k), isn’t guaranteed. Employees can opt for higher or lower risk investments based on their individual needs and comfort levels.
By various estimates, the California plan could save $30 billion to $60 billion over 30 years. And by various estimates, California’s pension funds are short of covering their obligations over those same 30 years by $150 billion to $450 billion. So Allen’s probably right. We’ll be revisiting this issue again in the not-too-distant future.
- Jim Sweeney