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Privatizing pensions will cost state more, hurt public services
Under proposals by Assemblyman Keith Richman, Californians could see pension costs rise and future investments in the state’s economy decline. ACA 5, authored by Richman, would scrap the current pension plans for teachers, firefighters, police, nurses, school and local employees, and instead force all new employees into a 401k-style defined contribution plan run by for-profit investment companies.
CalPERS investments are a critical part of the economic fabric of the state. Currently, approximately $19.4 billion – or 11.3 percent of CalPERS total assets -- were committed to be invested in California . The investments build houses and office buildings, providing the funds that pay for thousands of private-sector jobs and financing homes for California families.
Pension experts at the California Public Employees Retirement System (CalPERS) note that Richman’s proposal will not help balance the state budget, and in fact will cost the state more to set up and run new defined contribution plans.
“Converting to defined contribution plans will require the state to pay start-up costs, while continuing to pay the costs of running defined benefit plans for existing employees” said Pat Macht of CalPERS. “The unfunded liability will only get bigger, causing the state to pay more at a time when we already face an $8 billion budget deficit.”
The average state employee retires at age 60, with 19.5 years of service, and a benefit of $1,673.82 a month. “Cutting pensions for teachers, firefighters, police and school workers will make it harder to recruit and retain skilled workers,” said Clyde Rivers, president of the California School Employees Association. “This proposal is similar to the Bush Social Security privatization, only worse. It forces all public employees to gamble their retirement nest eggs in the stock market.”
Administrative costs for defined contribution plans average 2 percent of assets, compared to .18 percent for defined benefit plans. Typically, 80 cents of each dollar in defined benefit plans are spent on benefits, compared to 50 cents of each dollar in defined contribution plans.
“The Richman proposal will line the pockets of Wall Street bankers, while emptying the pockets of public employees,” said Rob Feckner, acting president of the CalPERS board.
ACA 5 is opposed by public employers as well as employees. Both know that quality benefits are vital to recruiting and retaining workers to teach our children, keep our homes and streets safe, and monitor the water we drink and the air we breathe.
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