Please don’t get rid of all the pension plans

In a lot of ways, traditional pensions are much better than the so-called defined contribution plans — mostly 401(k)s — that have largely replaced them in the U.S. private sector. A group pension is less expensive to administer than lots of individual investment accounts. Professional pension managers generally do a better job of investing than individuals with other things on their minds. Forcing people to save via a pension, while it limits freedom of choice, is a better way of ensuring adequate retirement income than simply offering a tax-advantaged or even employer-subsidized opportunity to save. And by spreading longevity risk over thousands of people, pension funds don’t have to set aside as much money per person to guarantee an adequate retirement income as individuals saving for themselves do.

What’s wrong with traditional pensions? Most were designed with the idea that people would spend decades with the same employer, which few do anymore. More important, they are often plagued by governance problems. Pension commitments made today don’t have to be paid out until decades in the future, and there’s a long history of those responsible for pensions promising too much while failing to set aside enough money.

In the corporate sector, pension failures in the 1960s and early 1970s led to the passage of the Employee Retirement Security Act of 1974, which set up a pension insurance program and mandated minimum standards for pension funds. In 1985 the Financial Accounting Standards Board followed up with rules for reporting pension liabilities in corporate financial statements. The goal of these changes was presumably to make pensions safer. The main result, though, was to persuade corporations to stop offering pensions and replace them with 401(k)s that saddled employees with most of the responsibility and all of the risk.

ERISA exempted public pensions, though, and they didn’t go away. The federal government shifted in the 1980s from a pretty generous pension plan to a less-generous pension plus a 401(k)- style defined contribution plan. State and local governments have tended to stick with pretty generous pensions, in part because many state and local employees aren’t covered by Social Security and in part because the politics of cutting back on pensions are so fraught. Some states have managed this responsibly, setting aside lots of money to cover future liabilities. Wisconsin and South Dakota have done the best, with 100-percent-funded plans. Some haven’t. Illinois and Kentucky are the worst, with funded ratios of 39 percent and 44 percent respectively as of 2013. There’s not really a national pension crisis, but there definitely are states and municipalities with unsustainable pension systems, and lots more that will face funding challenges as all those baby boomers keep retiring.

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Enter John Arnold, a Gen X billionaire from Houston. Arnold made millions trading natural gas for Enron before it collapsed, and billions trading gas at his own hedge fund, Centaurus Advisors, before retiring in 2012 at the age of 38. Since then he and his wife Laura, a former corporate attorney, have focused their efforts on charity. But not the usual charitable stuff — instead, according to Bloomberg’s Dan Murtaugh, they “are targeting contrarian, underappreciated causes, things like research integrity, drug-sentencing reform, organ donations and broken pension systems, an especially radioactive issue.” On pensions, Murtaugh writes:

They don’t recommend specific changes, only present states and municipalities with options. Through their advocacy organization, they support candidates and ballot initiatives, sometimes providing the vast majority of the donations in places including Phoenix and San Jose. They include legal work to defend the changes from court challenge. The Arnolds supported the overhaul of the Rhode Island pension system led by state Treasurer Gina Raimondo who they later backed in her successful gubernatorial run.

Basically, together with the Pew Charitable Trusts’ Public Sector Retirement Systems project, the Arnolds are redesigning the country’s state and local retirement savings plans — at least the more-troubled ones.

In “The Plot Against Pensions,” a 2013 report for the progressive think tank Institute for America’s Future, activist/journalist David Sirota described the Pew/Arnold effort as a right-wing effort to “slash modest retiree benefits and preserve expensive corporate subsidies and tax breaks.” The Sirota report is largely innuendo, referring repeatedly to “Enron billionaire John Arnold” and implying that the Laura and John Arnold Foundation is irredeemably tainted because it hired somebody who once worked for Republican former House Majority Leader Tom DeLay. Matt Taibbi chimed in later that year with a Rolling Stone story titled “Looting the Pension Funds,” in which, in trademark fashion, he described John Arnold as a “lipless, eager little jerk with the jug-eared face of a Division III women’s basketball coach.”

Arnold has since changed his look by growing a beard, and describes himself as a moderate Democrat. His foundation is also funding research into “the budgetary risks and economic returns associated with tax credits, deductions, and exemptions.” Its “solution paper” on “Creating a New Public Pension System” endorses many of the benefits of pensions outlined above. Still, most of the pension reforms the Arnolds have been involved with have in fact resulted in reduced payouts and at least a partial shift away from defined-benefit pensions and toward defined- contribution systems where employees bear the risk. For state and local officials, these choices are understandable — they put retirement systems on a more stable footing without requiring big tax increases. A nationwide stampede toward defined contribution government retirement systems would be a shame, though. Pensions are actually great things, when they’re not terribly run.

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