Defusing the Pension Bomb: Making Retirement Plans Solvent for All Public Workers

INTRODUCTION

Arizona’s current public pension systems are costly, present needless risk to taxpayers, and drain tax resources from other potential uses. If policies are not changed, taxpayers will be on the hook to pay for these bloated plans far into the future, and other government programs may have to go on the chopping block to pay for pension benefits. Young employees, part of whose salaries are funding current pensions, are also at risk of never receiving the benefits they’ve already paid for if pension funds collapse under the weight of poor policy.

These risks are already understood by the Arizona legislature, as evidenced by the passage of Senate Bill 1609. This bill limits abuses such as “double-dipping” when retirees go back to their same jobs while receiving a pension. It also requires current employees to contribute more to their own retirements. However, the real risk is in the nature of pension systems themselves. Benefits guaranteed at future taxpayers’ expense have to be funded even when economic times are bad. Benefits that are granted to retirees when economic times are good and pension funds’ portfolios are flush cannot be rolled back when portfolios collapse with the pop of an economic bubble.

One way to see how Arizona’s pension systems stack up is to compare them to a private employer’s 401(k) contributions to employees. The average private employer’s contribution to an employee’s 401(k) is 3 percent of salary. Taxpayers are currently contributing about 9.8 percent of state government employees’ salaries to their pensions, amounting to $173.6 million per year. If the public contribution fell to 3 percent of government employees’ salaries, the annual contribution would be $53.1 million, saving $120.5 million, or more than 10 percent of Arizona’s projected $1.1 billion budget shortfall for 2012. But the current level of public funding of pension plans is likely to remain the same into the foreseeable future as pension fund portfolios are rebuilt to make the systems financially sound.

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