Recent Baltimore Sun editorials and financial commentators have criticized gubernatorial candidates for not coming up with explicit plans to resolve pension and retiree health insurance liabilities. From the tone, it appears that the only thing that would satisfy these critics would be to completely dismantle our retirement systems. But the media's push for do-it-your-self-style retirement plans does nothing to offer real, long-term solutions.
Public retirement systems have evolved and been modified over a number of years to provide public employees with modest rewards for their years of dedicated service to the residents of Maryland, while also offering the best value to taxpayers.
The average state retirement benefit provides less than $20,000 per year to state employees who have worked hard to protect foster kids, supervise parolees and probationers, keep state prisons safe and maintain good highways — often with inadequate resources, limited staff, periodic pay cuts, layoffs and furloughs.
That pension funds are not 100 percent funded is hardly new. In fact, with the exception of a brief period in 2000, Maryland's pension funds have always been below full funding. Much like a mortgage, pension funds are designed to be funded over long periods, through investments and employee and employer contributions. As the stock market fluctuates, the funding levels fluctuate too.
Most government pension funds have 70 percent to 75 percent of the assets necessary to provide promised benefits. Eliminating the option of participating in the traditional retirement systems for new hires would create new funding problems, since their contributions would not be added to the pool.
The idea being promoted by some Republicans and much of the media is to abandon the security of the shared pooling of risk and funds and the use of professional investors. Instead, they suggest a defined contribution plan. This effort mirrors the proposal to privatize Social Security that would put all the nation's retirees in jeopardy.
Are individual investments a good idea? As a portion of one's savings, they are not a bad idea. But as the sole source of savings, stock market gambles do not serve individuals or the public well. Thousands of employees with 401(k) plans have had to choose between delaying retirement because of stock market turmoil, or an inadequate retirement allowance. Total dependence on individual investments could force retirees to become a financial burden on the next generation — and on the public dollar.
The median account balance of all 401(k) accounts in the U.S. is less than $13,000, barely a fraction of what is needed for a secure retirement. In aggregate, the gap between what Americans have saved and what they will need in retirement has been calculated at $6.6 trillion.
The contrast is clear: While public pensions have decades to achieve funding, using pooled resources to create a bridge during difficult economic times, people in 401(k)s must accumulate the necessary savings during the career of an individual employee — and, more importantly, keep it from being cut in half during a recession. Given our current financial situation, this may be impossible.
A recent report by the Department of Legislative Services found that the type of system the state currently has offers some key advantages. The investment returns tend to be better and the portfolios superior because experts are involved. Because of pooled investments, investment expertise and the advantages of shared risks, the cost of providing the same retirement benefit is 46 percent lower for traditional pension plans than for individual investments.
It is worth noting that the state of Maryland has used the pension funds and health insurance funds as a cushion against bad budget years. Surpluses in the health insurance fund have been used repeatedly to help balance the budget. The funding design adopted by the legislature in the early 1990s has prevented adequate (actuarial) funding of the state's pension funds. Since state employees already give up some of their pay and time to help balance the budget, this extra budget balancing on their backs should stop.
Rather than pandering to the "Keep fear alive" crowd by advocating the abandonment of our legal and moral obligations to America's working families, let's work together toward a comprehensive solution.
Are changes to the current funding of benefits funding for retirement necessary? Yes. But to suggest short-term, drastic actions to respond to a long-term problem would be foolhardy at best. Instead, it will be important to review the research and findings of the newly created Public Employee Retirement and Health Benefits Sustainability Commission to glean the best of the results for thoughtful, balanced action.
Patrick Moran is director of AFSCME MD, which represents more than 30,000 workers in state government and higher education. His e-mail is pmoran@afscme.org.