Defined benefit plans cannot be sustained
Many civic groups are calling for the legislature to do something — anything — on pension reform. That’s fool’s advice. Instead, they should call on lawmakers to do the right thing. That means a defined contribution system. It’s the only moral solution that delivers a secure retirement for government employees and liberates taxpayers from funding a failed system.
Defined benefit plans are a thing of the past — except in government. Today, nearly 85 percent of all private sector workers participate in defined contribution plans such as 401(k)s. The chief reason is that defined benefit plans, which provide guaranteed lifetime benefits to retirees, have proved too expensive and unpredictable for employers to maintain.
States crumbling under the weight of pension liabilities also have transitioned to defined contribution plans. Michigan adopted a 401(k) system for new state workers in 1997. Democrat-controlled Rhode Island, which in 2011 had the nation’s second-worst-funded pensions, has converted to a hybrid system based on defined contribution.
It is virtually impossible for governments to ensure there will be enough money in defined benefit plans to make guaranteed payments to retirees. That’s why this system is so problematic. Who should make up the shortfall when the retirement funds lose money due to stock market corrections? Or when funding shortfalls mean foregone investment income? Or when politicians agree to excessively generous employee contracts?
The only real solution is to take away the control over government retirements from politicians, and put it in the hands of retirees. A defined contribution plan does this.
Unfortunately, the Nekritz-Biss plan that was under consideration earlier this month in Springfield missed the opportunity to make real change. Why? Because it would keep the defined benefit system intact.
As long as defined benefit pensions remain the linchpin of the state’s retirement systems, real reform will never happen.
Ted Dabrowski
Vice president of policy
Illinois Policy Institute