The benefits of choice in many areas of life are evident all around us. That begs the question why the state’s public pension system fighting to keep its members from having that choice.
Colorado’s Public Employees Retirement Association is the pension plan for the state’s public school teachers, state government employees, judges, and many of its municipal employees. Currently, almost all of them are enrolled in PERA’s Defined Benefit plan. This arrangement contrasts with the vast majority of private sector employees, who are covered by Defined Contribution plans, more commonly known as 401(k)s.
The difference between benefit and contribution is the difference between owning a piece of a promise, and owning a piece of an asset.
Senate Bill 80, current state legislation sponsored by Sen. Owen Hill and Rep. Paul Lundeen, would permit all newly hired PERA members to choose PERA’s Defined Contribution plan. Right now, only state employees and certain community college hires have that option. All other new members are automatically enrolled in the Defined Benefit plan, with no option to switch to a 401(k).
All PERA members do have the option to join PERA’s contribution plan, or its 457 Deferred Compensation plan, but they must contribute additional salary in order to do so. They can’t leave the benefit plan, which takes 8 percent of their salaries.
PERA’s Executive Director Greg Smith and its board of directors oppose SB 80. Citing an official estimate, they say that the expected exodus from the Defined Benefit plan would put taxpayers $4.2 billion further on the hook. PERA acknowledges an existing long-term unfunded liability of $25 billion.
Since PERA currently depends on contributions from new employees to help make up the large deficit, this extra burden would make it harder for PERA to reach full funding within the 30-year window set by 2010’s reforms.
PERA also notes that historically, 401(k) accounts tend to underperform. Individual investors tend to change investments more often, and mutual funds are subject to higher management fees than PERA collects on its benefit plan. They also note that the contribution plan offers neither survivorship nor disability benefits.
Even if all those statements were true, they do not provide enough reason to keep new teachers forcibly enrolled in a system that is failing them.
A recent study by the liberal Urban Institute graded PERA an F for rewarding younger teachers, and for encouraging work at older ages; and a D for providing retirement income for short-term employees. In large part, these grades are a function of PERA’s vesting policies. Right now, teachers have no choice but to sign on to those policies and their incentives. It is fundamentally unfair to allow state and community college employees, but not teachers, to opt out of those restrictions.
Moreover, PERA’s defined benefit, survivorship, and disability benefits are only as good as the entity backing the promises: the people of Colorado. Were the state unable to meet the obligation, those promises might well be placed in jeopardy.
We have a moral obligation to keep promises already made. We have an equal obligation not to make additional promises we might not be able to keep. Nor should we encourage others to trust in those promises merely to ensure we can meet those already on the books.
SB 80 doesn’t force new employees to join a defined contribution plan. Rather it extends that option to the rest of the PERA workforce. If PERA’s Defined Benefit plan really is a better deal, its management should be able to — and required to — make that case continually to new employees.
PERA currently publishes a decision guide for new members, ostensibly to help them make a well-informed choice. In fact, though, the guide is heavily weighted toward the benefit plan.
Suppose that, instead, PERA were to spend that effort educating members on becoming wise investors.
PERA and the state of Colorado owe it to teachers and other government employees not to deal with them as unsophisticated rubes who are easily taken advantage of, but rather like the adults they are, capable of deciding how much risk and direct involvement they want to take in their own futures.
Joshua Sharf manages the PERA Project at the Independence Institute, a free market think tank in Denver.