Editor's Welcom
People my age don’t generally think about retirement.
At issue is the traditional defined benefit plan, often referred to as a pension. Common at almost every company during the middle years of the past century, it has fallen out of favor due to the risk it places on the entity that offers it. It’s been replaced with 401(k)-style plans, which make saving the responsibility of the individual. Public institutions were, for the most part, the last pension holdouts. But now public funds everywhere are in trouble.
Just because the retirement funds are better off than many funds doesn’t mean the city and the university don’t have the pension jitters. Squeezed by tight budgets, uneasy about the future of the financial markets and facing a wave of baby boomer retirees, both the city and the university are looking for a way to reduce their future obligations.
How to do that? For the UM System, the private sector and other universities have led the way. Long ago, companies saw that they could reduce uncertainty about future costs by ceasing to offer traditional defined benefit pensions, which offer a regular check until death.
The funding requirements for those plans fluctuate with the market. When times were good, companies offering the pensions didn’t have to pay that much to keep the plans sound. When times are bad, such as now, they have to make up for what the market doesn’t produce. And the bigger the fund, the wider its fluctuations can be.
A defined contribution plan, on the other hand, decreases the range of possible contributions. Individuals bear the market risk and are responsible for their own saving. Companies promise to match up to a certain percent of what employees save out of their paycheck, so companies know better what the range of their costs will be.
The city, on the other hand, is unlikely to make such a switch. Pensions are important for jobs such as police officers and firefighters. As citizens, we’d prefer those protecting us are, on average, younger and in better shape. We offer them defined benefit plans so they can retire younger and we can hire still younger people to fill their old jobs.
As citizens, we’d also prefer that the people protecting us stick around to develop some institutional knowledge. Unlike a 401(k), which can be transported from job to job, pensions require that people stick with their jobs for years.
Now, as citizens, we have to decide how much we’re willing to pay to keep these retirement funds solvent. What we don’t pay for will come out of employee checks, which makes the jobs less attractive to potential applicants. Thanks in large part to Mayor Bob McDavid’s foresight in tackling the issue, we have time to wrestle with these questions.
In the case of the university, we’ll have to decide if the possibility of paying future pension liabilities in the form of higher tuition and reduced funding for other activities will be worth it to attract and retain high-quality faculty and staff.
Both the city and the university’s funds are in good shape compared with many other plans. Still, the financial crisis spared no individual nest egg and no public retirement fund from pain. Creative solutions and compromises seem to be the only way out of this mess.