California shows way through tricky pension mess

June 8, 2012

By Agnes T. Crane

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

San Jose and San Diego want current public workers to make sacrifices for their pensions, like contributing up to 16 percent more of salaries to fund retirement schemes. The proposals, overwhelmingly backed by voters in elections this week, look to be a sensible way forward in the thorny thicket of pension reform.

Since the downturn, new hires have borne the brunt of belt-tightening in the nation’s public sector. They, not their elder cubicle mates, have had to swallow diminished expectations for their golden years. This unfair two-tier system is likely to further discourage the young and talented from considering a career in the civil service. In addition, such marginal reform won’t be enough over the long term to fill a $700 billion shortfall in America’s public pension system. A better approach is burden sharing – something San Jose and San Diego are trying to push through.

Their proposals, though different in form, both demand sacrifices from those already on each city’s payroll, and voters agree. San Jose won 70 percent for its measures, while San Diego got the backing of two-thirds of the electorate. The southern California city wants to freeze salaries for five years in a bid to slim future liabilities.

Silicon Valley’s Anchor City, meanwhile, is pushing for something more interesting. It hopes to encourage, but not force, workers to opt for what could be a cheaper, less generous, benefit scheme. If employees want to hold onto current benefits – like retiring by 55 – they’ll have set aside up to 16 percent of their salary for pension contributions. If everyone took that option, the city could save $25 million a year – potentially reducing the city’s own payout by around 10 percent. Alternatively, employees could keep their pension contributions as they are and instead help the city save money by accepting reduced perks like halving standard-of-living adjustments and not retiring until they turn 62.

None of the options, however, is pleasant for workers. Unions have already filed suits to contest the proposal in San Jose. Yet such burden sharing looks inevitable. Historically, markets have done the heavy lifting for pension funds. Beefy 8 percent annual investment gains, however, look increasingly unrealistic. Many state and local government budgets, meanwhile, are already stretched to the breaking point. That leaves employees, who have traditionally contributed the least, to step up if they hope to have any pension at all. Better to try to find a solution now than wait until it’s too late.

Comments

This lets San Jose City officials off to easy, they claim they need more police on the streets, maybe they do. If the funding tax base is not there the public has to accept reduced services are a fact of life. That is the real issue.

City officials instead are using the ballot box to get popular vote to over turn an legal and binding contract. If the City is that desperate it should file for bankruptcy. As that is the legal way to reorganize city operation. See if the politicians have the intestinal fortitude to do so..

Personally wanting to join a organization that does not respect contracts and negotiated agreements is not one that bright and young people should be interested in.
Slashing pensions to fund operations is being done so at the cost of the pensioners…Ballot box initiative like this usually are rejected by the legal community. This one should be too.

Young talent wanting to join a public agency that does not honor its agreements and looks to make ends meet on the back of pensioners is one that the young and talented will look at in suspicion.

Posted by Yerrep | Report as abusive
 

I say this as a liberal, and as someone who’s strongly against any further increases to Social Security’s retirement age, but I don’t think we can afford to let people retire at age 55. Barring disability, at least.

The previous commenter says that the city shouldn’t do anything to existing contracts, and it should just accept reduced services. You can only go so far with that. Remember, the city covers education and public safety. How much less of that is acceptable?

In addition, younger adults, of which I am one, won’t go into public service if there’s a huge disparity in benefits between the younger workers and a grandfathered class of older ones. There’ll be resentment. We’ll go into the private sector.

In any case, this is an issue bigger than just San Diego and San Jose. Pensions in general are hard to fund. The sponsor is taking on some very long-term financial liabilities. In addition, you ideally need people paying into the plan as well as drawing from it, and if the sponsor goes into hard times (like state budget cutbacks or the industry declines), then so does the pension.

Posted by weiwentg | Report as abusive
 

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/