Over the last few days, a number of politicians have proposed the elimination of defined benefit pensions for new government employees and have forced them into 401K-style retirement plans. In addition, these politicians have proposed increasing all current public employee contributions by 10%, raising the retirement age to 65 and doubling the vesting period from five to 10 years. These comments have been made in general context, but as far as we know, there is nothing stated that will exempt police and fire from the proposed changes.
The real crisis in this country is not the defined benefit plan (pensions) that most public sector employees contribute to, but reliance on these defined contribution plans for retirement that most private sector companies have set up for their employees. Defined contribution plans (401(k) plans, 403(b) plans, employee stock ownership plans, and profit-sharing plans) are destined to leave most Americans either retiring into poverty, or working until they die.
Defined benefit plans for LAPD officers have been around since June 7, 1899, and have proven to work. The Los Angeles Fire and Police Pension system, since the economic downturn, is currently 96.2% funded. Members contribute up to 9% of their bi-weekly pay, which adds up to $120,287,911 for the 2010-2011 fiscal year. Even with this sizable amount, the majority of the money needed to fund the pension systems comes from investments not contributions by the City or police officers.
The real crisis is the jerry-rigged defined contribution system, which sprung up from a tax loophole in the 1980s. As private companies abandoned their defined benefit plans, they pushed employees into defined contribution plans. Their employees were now forced to take both the risk of investment, along with longevity risks---the chance that they would outlive their assets.
The most sobering news came this week from the Employee Benefit Research Institute, which is the leading organization that surveys Americans and their preparations for retirement. A staggering 54% of Americans have less than $25,000 saved for retirement. Less than half of all Americans are aware of how much money they will need to save for retirement. As the era of defined contribution plans has grown, Americans are realizing that they cannot afford to retire. Defined contribution plans work great for millionaires, or maybe even for those with high salaries. However, the past century has proven the efficacy of defined benefit plans, with tens of millions of Americans comfortably retiring under these pension plans. As defined contribution plans stagger into their third decade of existence, evidence points to the failure of providing Americans with any semblance of a secured or dignified retirement.
If one believes that Americans should retire in poverty, then they will also agree with elected officials who believe that the era of defined benefit plans is over.
