Firefighters Offer Their Perspective on Public Pension Reform
by Lou Paulson
Lou Paulson is a 20-year fire captain with the Contra Costa County Fire Department. He currently serves as president of California Professional Firefighters, representing 30,000 rank-and-ﬁle first responders.
There is a looming retirement crisis in California and around the country that — if left unattended — will impose untold millions of dollars in additional costs to state and local government, and threaten vital services such as police, fire, transportation and parks.
Are you surprised to hear this sort of talk from a union leader? You shouldn’t be. It’s all right there in black and white from the nonpartisan Employee Benefit Research Institute (EBRI).
By 2030, according to the EBRI, retired Americans will be approximately $400 billion short of the money they will need to meet the basic necessities of life. EBRI also estimates that retired couples will need nearly $300,000 to pay out-of-
pocket medical costs between the time they retire and when they die.
Quite simply, by 2030, retired Americans will be facing a cavernous gap between what they have and what they will need — a huge “unfunded liability.”
Defined Benefit: Why It Matters
A secure retirement is one of the cornerstones of the “golden age” of the American middle class. During the height of our nation’s prosperity, employers and employees forged an unspoken yet sacred compact: “Give us your best 20 to 30 years, and we’ll make sure that your basic needs are met when you retire.” For most of the 20th century, taking care of retirees was regarded as a baseline measure of a humane society.
For firefighters and others who face danger to protect the public, retirement security is about more than politics — it’s about our future and that of our families. We live shorter lives, get cancer more often and suffer more injuries. For many of us, retirement security is the promise that motivates us to continue lining up for dangerous duty.
This is why firefighters — along with police officers, teachers, nurses, bus drivers and ordinary working people — are fighting so hard to protect our retirement security through defined benefit pensions.
As employers, I don’t need to explain to you why a secure pension is so important to the business of public service. In an extremely competitive global economy, we need to attract and keep the best people we can to give the taxpayers their money’s worth. A secure retirement is the best recruitment and retention tool we have to keep our most experienced people and spare taxpayers the expense and lost productivity of constant training and retraining.
And it goes without saying that defined benefit pensions are a better deal for employees. A secure retirement income allows middle-class workers to keep their homes, fulfill their post-retirement dreams and, for many, ensure that they are able to handle the increasingly burdensome expenses associated with retirement. Even the most rabid foe of secure pensions will acknowledge that a defined benefit is usually a better deal for retirees.
America’s Real Pension Gap
Defined benefit programs have more than “right” on their side. Modern pension plans also stand as a barrier against the explosive impact of the coming wave of underfunded Baby Boom retirees. Consider what is happening in the larger world of retirement.
- The median value of retirement accounts in all U.S. households is $27,000 (Congressional Research
- More than one out of five adults have done nothing to prepare for retirement (Wall Street Journal, Harris Poll).
- Approximately one-third of those with retirement accounts have already dipped into them for emergencies or large expenses (Wall Street Journal, Harris Poll).
- Only about half of those who rely on 401(k) accounts for their retirement follow their investments with any degree of precision (Dow Jones).
The result? A projected $400 billion retirement security gap — one that will grow by an estimated $45 billion a year.
Nobody talks about these “unfunded liabilities,” perhaps because they only affect individuals, and it’s a quarter century away. But the impact of this ever-widening retirement security gap on the social safety net could be catastrophic. Whether it affects the healthcare system and social welfare programs or increases public safety costs, local and state government will be stuck with the tab for mitigating these needs.
But as ominous as it sounds, try running the numbers with another 2 million to 3 million public employees in the mix — many of whom may have never paid into Social Security. And who’s going to fill in that $300,000 gap in retiree healthcare costs?
The blunt economic reality is that, far from trying to game out ways to eliminate defined benefit pensions, we should be moving forward together to bring real retirement security to all Americans. Not just for the sake of our retirees, but for our own fiscal futures.
Toward Secure Retirement for All
Fortunately for all of us, the opportunity presents itself to build a true reform consensus on the subject of retirement security. In the two years since Gov. Schwarzenegger introduced his ill-fated plan to wipe out all defined benefit pension plans, the stock market has stabilized, and pension funds are once again moving toward full funding. And the governor, having learned the pitfalls of shooting without aiming, has moderated his approach, calling for a bipartisan study commission on the issue of pensions and retiree health care.
In this more rational context, we all share an obligation to move beyond old animosities and finger-pointing and build a consensus around pension changes that secure the future for employer and employee alike. We in labor are
committed to that partnership on the basis of a few core values:
- A deal is a deal. If benefits have been promised an employee, they should be delivered — period. The courts have mandated it, and it’s simply the right thing to do.
- Pension fund contributions are an obligation, not an option. If we learned anything from the 2001 stock market meltdown, it’s that we don’t stop paying into the retirement kitty just because we had a good year.
- The future should not be sacrificed for the present. On the firefighting front lines, everyone shares the same risk. We can’t sell out or discriminate one class of public servant simply because they had the bad luck to be born too late. If anything, these are the employees we should be doing the most to protect because they will be the most at risk if and when Social Security takes a dive.
With these basic principles as a foundation, labor stands ready to be a partner in addressing the retirement security issues that deserve attention. We have two choices when it comes to the pension debate. We can continue to throw rhetorical haymakers and toss around unfathomably large numbers, or we can embrace the spirit of post-partisanship in our dealings with each other.
We share a common commitment: to protect the public and provide the highest quality service we can for our taxpayers and our citizens. We all win when we keep our best and brightest. We all win when we spare taxpayers additional weight on an already overburdened social safety net. And we all win with a prosperous future.
Defined Benefit Versus Defined Contribution
The basic retirement plan for most, if not all, public employment in California is a defined benefit model. This means that the retirement allowance for a retiree is based on a formula that includes the amount of time (service credits) for public employment, a retirement factor (a percentage, usually in the 2 to 3 percent range, depending on the optional plan adopted), and the employee’s “highest compensation.” The highest compensation (salary, for the most part) can be the average salary over a number of years (typically three years) or the highest single year of compensation/salary (the trend is to move to the highest single year). For example, to calculate a “3%@55” formula for an employee with 30 years of service, multiply 30 years by 3 to arrive at 90 percent. The employee would be eligible to receive 90 percent of his or her highest compensation as an annual pension at age 55.
Defined Benefit Plan
The defined benefit plan has two key features:
- The employee is guaranteed a certain retirement benefit based on a formula; and
- The employer/taxpayer is ultimately responsible for meeting the financial obligations to retirees based on the benefit formula. That is to say, if more money is needed to meet retirement allowance payouts to retirees, employer contributions to the system are raised.
The target of public pension system reformers has been to change the defined benefit plan to a plan that does not place the ultimate financial responsibility with public employers and the taxpayers. The plan that would have been established in Assembly Member Richman’s initial proposal was a defined contribution plan.
Defined Contribution Plan
In a defined contribution plan, contributions are typically made by both the employer and employee. The amount of the contributions can be fixed in law and typically does not fluctuate as does the employer contribution under a defined benefit plan. The funds from employer and employee contributions are then invested and earn what they earn (or lose). The sum of the employer and employee contributions, along with investment earned on those contributions, is the amount of money available to pay retiree benefits.
A defined contribution plan has two key features:
- The amount of the pension is not guaranteed; and
- A greater responsibility to meet retirement benefits rests with the employee and not the public employer or taxpayer.
Defined contribution plans are not a new concept for local government. Many local governments today have deferred compensation options for local employees but these options supplement existing defined benefit plans. The first version of Assembly Member Richman’s proposal eliminated all public sector defined benefit plans and replaced those plans with one defined contribution plan. Richman subsequently modified his proposal to offer a hybrid plan consisting of elements of a defined benefit plan, plus a defined contribution plan. Based on a set of assumptions, this plan was constructed to meet a targeted amount of retirement benefits for public sector employees.