As Lincoln’s Pension Review Committee members contemplate the future of police and fire department retirement benefits, they should reject the approaches trumpeted by a California politician at a recent hearing.
The recommendations of former San Jose Mayor Chuck Reed (“Governments need to reform defined benefit plans,” February 14, 2016) run the risk of doing more harm than good in the long run.
There is no doubt that we are facing a serious retirement savings crisis in American society. The majority of people lack enough savings to retire, and financial insecurity is a major source of stress for many Americans. However, much of the problem is self-inflicted, an outgrowth of the short-sighted pension policies adopted in response to sudden market downturns.
Our analysis of empirical data shows a serious downside to the seismic shift over the past quarter-century from the certainty of a traditional “defined-benefit” pension to the uncertainty of a “defined-contribution” plan. Income inequality is exacerbated when workers are asked to shoulder more financial risk, increase their contributions disproportionately, and accept watered-down benefits. Retirees who are living on reduced means exert a drag on local economies, and this ripples out into the community, affecting everyone.
We are just beginning to see how detrimental the decades-long craze for do-it-yourself retirement planning has been to our society. Angus Deaton, who won the Nobel Prize in Economics last year, concluded in a recent paper that distress created by the move to defined-contribution plans has contributed to higher morbidity and mortality among middle-aged Americans—in other words, 401(k) plans can actually be bad for your health. Stephen Kay, a senior economist at the Federal Reserve Bank of Atlanta, has documented how countries in the Americas and Europe that had rushed to convert defined-benefit pensions to defined-contribution plans are now switching back – a cautionary tale we’d be foolish to ignore.
Finally, the argument that we can’t afford to pay for pensions is disingenuous. The oft-cited “unfunded liabilities” of traditional pension plans are used as a scare tactic; these liabilities are talked about as if they are an immediate cost when in fact they are spread over 30 years. Furthermore, state and local governments have chosen to make their taxes increasingly regressive and volatile by turning to casinos, lotteries, and excise taxes on cigarettes, beer, wine, and spirits. In Nebraska, progressivity of state and local taxes has declined by about 10 % since 1977. Increased volatility in revenue streams unnecessarily strains a government’s capacity to provide steady, long-term funding to pensions.
Lincoln’s police and fire department workers put their lives on the line every day, and their pension benefits are an integral part of their wages. Rather than balancing the city’s budget on the backs of its public safety workers, the Pension Review Committee should preserve defined-benefit plans, adopt a more progressive tax system, and redouble its commitment to systematically fund pensions in good times and bad.