The big drops in the stock market can make people reassess their portfolio. I found myself wanting to reassess Chuck Reed and Carl DeMaio’s pension measure.
As readers know, I’m deeply skeptical of the ability of ballot measures to resolve difficult problems without making things worse. And the legislative analyst office assessment of the latest pension initiative from Reed and DeMaio, which showed all the uncertainties around the measure, was convincing for those of who live by the law of unintended consequences.
But circumstances change. And the big drops and turmoil in global markets should require another look at the pension issue. With each investment loss, taxpayers like me are on the hook for more. Paying to make up investment losses – and really, the much too-high return that our pension funds guarantee – means less of crucial services. And those services are already too low.
Maybe we need that ballot initiative thunderbolt – to change the reality, and protect us if we’re heading into a long bear market.
And of course, the drop in the markets inspires another feeling. Boy, people really need pensions, because who wants their retirement tied up in these crazy markets. Don’t we need a pension system that provides protection for us all?
So I re-read the initiative again.
And, re-reading it in this urgent context, it’s even more wanting than before.
It’s far from clear that the initiative would protect taxpayers or anybody else. It would merely throw questions of retirement to elections, which means throwing the question to campaign donors and political consultants. Why make an already difficult problem even more difficult by bringing in the dysfunctional ballot and election process? Heck, it’s conceivable that employees could win even more generous pensions at the ballot.
Re-reading the initiative, it felt like a dodge. A way to turn a difficult question of retirements into even more difficult questions of democracy. Maybe we ought to fix that local democracy first. (Also, it doesn’t help that this initiative, like other recent ones, gives initiative sponsors and citizens unaccountable power to defend the measure in any future court challenge).
I wish Reed and DeMaio, whose intentions are good (despite what the unions say), would drop this and try to reckon with the problem more directly. We need a new kind of pension system that protects taxpayers and more people.
The best idea on this subject in the California context remains the suggestion from my former New America Foundation colleagues Micah Weinberg and Mark Paul for a shift to cash-balance pension plans.
Cash balance plans are a hybrid of defined-benefit pension and defined-contribution 401k. They offer protection – but more flexibility and less risk. As Micah and Mark wrote in 2010:
A cash balance plan has two pieces. As in a 401(k), an employer contributes a percentage of a worker’s salary into an account that belongs to the worker. But unlike a 401(k), the employer guarantees a stated annual rate of return — say 5%, or something close to a risk-free return — on the money in the account.
A cash balance system has advantages for workers and taxpayers. Because it is portable and always vested, workers can move to a new job and take it with them. Because the return on their accounts is guaranteed, workers do not bear the risks of untimely market
For taxpayers, a cash balance plan reduces the risks of pension underfunding and overpromising. The public is liable only to make a defined contribution each year and to pay the guaranteed return on each worker’s cash balance. And because the guaranteed return is modest, the money can be in very safe investments. It is a much better fit for California in particular, a state with a governing system that pushes local and state government toward sending today’s bills to tomorrow’s taxpayers.
This is still a great idea. And it’d be best to do this legislatively, but, yeah, yeah, I know. If you must, do an initiative (though please make it amendable). One feature of the plan would be to make sure there’s a similar plan for private workers in California to which employers could contribute – so initiative sponsors could say that they are trying to expand retirement protections for everyone.