Felix Salmon has recently posted a creative critique of my foundation‘s pension reform efforts, and specifically of Mayor Chuck Reed’s ballot initiative in California. As is true with any complex policy debate, simplified criticisms make good headlines but miss precisely the nuance that makes these problems challenging and controversial.
Here is the crux of Salmon’s argument: Current public retirement systems severely backload benefits, as illustrated by LJAF’s own analysis, which Salmon includes in his article in graph form. He argues that any proposal that seeks to renegotiate prospective benefits, such as the Reed proposal in California, is inherently unfair because it fails to recognize the benefits that workers rightly expect under the system, and it provides jurisdictions the power to renege on their promises to employees. Salmon then uses a simplistic but attractive analogy to argue in favor of what is known as the “California Rule.” He argues that entering into a pension system is like being given restricted stock — a concept he calls “restricted pension units” (RPUs) — and that these RPUs, granted at the beginning of a career, mature over the course of a worker’s 25-to-30-year tenure. If a worker walks away from employment, she forfeits the right to earn additional benefits under the system, but as long as she is employed, she is guaranteed to earn benefits under the same RPUs (pension parameters) that were in place when she was hired.
Let’s start with the points on which Salmon and I agree. We both believe that public pension plans should work differently than they do today. Under current plans, workers generally earn meager benefits for much of their careers, and only become eligible for a significant retirement benefit after 25 or more years of work for the same employer. This back-loading of benefits means that many public workers are retirement insecure for many years of their working lives. In fact, most of these workers, who will not stay for the requisite 25-plus years, will never achieve the level of retirement security promised under the current system.