Building an Economy that Works for Everyone

Knives out for public pensions as retirement security diminishes in private sector

Steven Hill, director of WA State Department of Retirement Systems (left), State Sen. Joe Zarelli (R-Ridgefield) (right)

The revenue shortfall in the state budget means a favorite stalking horse has once again been let out of the political stable: pension plans for public employees. But The Columbian has the real story behind the rhetoric:

The attention on public pensions reveals as much about the benefits that private-sector workers have lost over the past three decades as it does about the perks that public employees still receive.

Today, only 15 percent of private workers still have pensions. The rise of the 401(k) plan has eroded the financial guarantees that were once available…[today] [t]he average 50-something has saved just $29,000 for retirement, which would amount to about $190 a month, according to Wells Fargo’s annual retirement survey.

A decent pension seems the least we can do for public sector employees, given that that their pay is actually well below that of their private sector peers when education and specialty skills are factored into the formula. Again, from The Columbian:

The private sector includes educated and specialized workers, too, but businesses employ the bulk of low-paid, low-skilled workers, and their minimal benefits lower the average for all nongovernment workers. A firefighter might be classified as a service worker, but the job is a far cry from flipping burgers.

Despite the fact that state pensions are typically just 2 percent of pay multiplied by the years worked (for an average benefit of just $18,676 a year), Governor Gregoire recently stated her aim to “rein in state pension costs“, and Rep. Joe Zarelli (R-Ridgefield) has proposed dropping the pension system entirely in favor of defined contribution plans.

Defined contribution plans are the norm in the private sector – at least, if you’re lucky enough to work in one of the 45% of firms that even offer a retirement plan – but Steven Hill, director of the State Department of Revenue and former human resources director at Weyerhauser, says there is good reason to be wary of them:

“The bad thing about defined-contribution plans is the track record. Employees don’t make good investment choices,” Hill said. Workers lack the expertise, he said, and a professionally managed pension fund has a better shot at a good return.

Hill isn’t the only one who questions the wisdom of the idea. Dan Foster, a financial planner in Vancouver, knows how quickly retirement savings can evaporate in the stock market:

Most people lack the sophistication to ensure a solid retirement on their own, said Dan Foster. “People are ruled by emotion when they need to make their investment decision with their brains”…“Most retail investors cut gains short and let losses run.”

The National Institute on Retirement Security has calculated that those without pensions are six times more likely to fall into poverty in old age.

With pensions nearly nonexistent in the private sector, and most 401(k) plans priced out of the reach of small- and medium-sized businesses, a secure, portable, and simple retirement option is more important than ever. That’s where Universal Voluntary Retirement Accounts (UVRAs) fill the gap.

An UVRA allows any individual worker to open a low-cost Individual Retirement Account (IRA), and makes it easier for small businesses to recruit and retain employees by offering them a way to save for retirement. The plans are completely portable, and ensure millions more Americans are able to live with dignity in their retirement years.

You can learn more about EOI’s UVRA proposal here.

More from The Columbian: Public employee pensions draw new scrutiny.

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