Ruling encourages adopting defined contribution plan

It’s not exactly back to the drawing board for the next phase of pension reform in Louisiana, but at least the opportunity to come up with something better presents itself, all the while recognizing that doing nothing is not an option.

With only a slight amount of stretching the state Constitution, the Louisiana Supreme Court last week declared that passage in 2012 of a cash benefit plan for new hires into state government did not have the requisite votes, and thereby invalidated the law that was, after an instrument passed in this year’ session, to take effect a year from now. The Constitution says that any actuarially change predicted as negative, even if really indeterminable and largely guesswork, to retirement fund solvency requires a two-thirds vote of the seated membership for passage in each chamber, and the House fell a couple short.

Using a bit of creative license – despite the Constitution’s not specifying that this applied to future plan members, the Court strung some statutes together and tortured the mix to say that it somehow did – to wipe the statute away, this eliminated a minor but useful means by which to defuse the ticking time bomb that is the state’s unfunded accrued liability, now in the neighborhood of $20 billion and costing taxpayers an extra $1 billion or so a year to finance.

The cash balance plan, which would have money invested by employees with a guarantee of no loss in exchange for lower potential returns that would improve the situations of some retirees, be less generous for some, but, unless there was an extended period of losing investment performance would cost taxpayers less, marginally have would attenuated the growing imbalance caused by the generosity of Louisiana’s plans in conjunction with other forms of compensation. But every year that goes by without it or something like it, unjustifiably more wealth is transferred from the people to potential future retirees.

Now that the two-thirds requirement has become enshrined in all instances, perhaps policy-makers should go all the way to a defined contribution program, where employees have their contributions and the state’s pooled into a fund on which to draw that they manage, the amount fluctuating by investment performance, an option only available to a few thousand in higher education currently. This is opposed to the kind of plan all other state employees and school district employees have, defined benefit, that sets a fixed periodic retirement payment amount according to kind of job, salary, and years worked, which has asked too little for employees to pay and has been too optimistic in investment gain predictions to support the payments promised and has driven the mushrooming UAL.

The DC plan essentially would eliminate any negative impact on the UAL, leaving just the accumulated insolvency of the past to whittle away (which by the Constitution must be gone by 2029), while a CB plan over an extended stretch would not have much negative impact and probably none at all, so it would make more sense to go for the former, for the last attempt at this showed an actuarial gain. But the problem here is that this bill in 2010 went nowhere, probably because of the mistaken notion that the vagaries of the market could make many employees much worse off than under the current system, if not impoverished.

That’s entirely false, as shown by the several other states that either have gone completely to having only a DC plan for new hires, making them optional with a DB plan, or combining the two, and still reaping savings as compared to a mandatory DB plan. Further, going with a DC plan can solve for another potential problem with the federal requirement that state pension plans have a typical benefit at least equal to the commensurate payment from the pension system it runs also headed to insolvency, Social Security. There was some doubt that the CB plan as passed would have done that.

The political situation will have evolved considerably by 2014 from 2010. The UAL will have increased several billion dollars with 2029 four years closer and state government will have shrunk. Perhaps this will be enough to convince majorities to abandon the DB plan for new hires on fiscal considerations.

Yet if too many legislators still put special interests ahead of the citizenry and fail to enact a DC plan, there’s a simpler, if less principled and elegant solution: discontinue any retirement plan and instead have new hires enroll into Social Security. Then, the state would be paying only 6.2 percent of salary instead of the typical 8 percent (it often pays higher for hazardous duty personnel, and it may wish to continue to provide a state plan for them accordingly), and so would the employee who usually pays the same. That would mean more net pay for state employees, which makes it difficult politically to move against. True, this merely shifts difficult decision-making from the state to federal levels, which affects Louisiana taxpayers equally, but it’s better than doing nothing.

That’s because it should be obvious what’s left now after the ruling is the worst possible scenario. Any move away from the mandatory for most new hires DB plan would benefit the state, and it extending it to school district employees, which the invalidated measure did not, would be better still to prevent further UAL ballooning. That needs to be a primary focus of policy-makers in 2014.