The California public employee labor unions have a set of talking points they go to whenever the subject of reforming our taxpayer-backed pensions comes up. One major point they love to present boils down to this: “Employees can’t invest money as smartly as CalPERS [or other pension agencies] can. CalPERS will make a higher return, and will do it for less cost.”
While this assertion is rubbish, let’s compromise and give in on this point — let CalPERS continue to manage the employees’ retirement funds — even in 401k plans. The only thing we need to change is the taxpayer guarantee on the return earned, and the guaranteed amount paid out. In other words, we transition from a defined benefit (a guaranteed) plan with all its risks of unfunded taxpayer liabilities, to an earmarked defined contribution plan for at least the new employees — with the payouts reflecting the success or failure of the investments made by CalPERS et al.
Surely the unions would go along with this plan, right? After all, they keep telling us that CalPERS is making MORE than the optimistically projected rate of return, which doubtless would translate into even higher retiree payouts than our generous current pension plans offer.
Assuming that the pension proponents are correct, under this plan, the retirees will be even better off than now. If they are NOT correct, then at least the taxpayers won’t be on the hook for the less than successful investments made by CalPERS — the employees will. We taxpayers also won’t be on the hook for the fraudulent, outdated mortality tables currently being used in calculating the guaranteed pensions.
Does that sound insensitive? Not to me. That’s what just about ALL of us in the private sector face with our retirement funds — be the funds invested in qualified plans, or just personal investments.
To protect these government retirees from themselves, allow no lump sum withdrawals — only an actuarially calculated minimum annual withdrawal would be allowed — the same minimum required of people who have IRA’s, 401k’s, etc. I’m fine with that.
Let’s do the Apocalypse analysis. Assume (as the unions currently do), that these 401k plans go to zero — that all the investments lose 100% of their value (maybe nuclear war, or the big asteroid hits earth). Currently the government pensions would still be guaranteed by taxpayers, but there’s no way for anyone to come up with the shortfall — we’d all be broke (or dead) — and the pension fund would be empty. But make no mistake — the surviving union bosses would STILL demand that we pay the guaranteed pensions!
These union bosses and their defenders assume that public employees are clueless dolts — incapable of making investment decisions (gee, I thought we hired “the best and the brightest”!). But I give these employees more credit than the bosses do. I’d prefer that we give these new 401k plan holders a bit more flexibility in selecting their investment manager — someone in addition to CalPERS.
To keep the Bernie Madoff’s out of the loop, perhaps we limit such alternatives to no load index funds with uber-low management fees. It’s what I now use for my family.
401k’s are earmarked accounts — each worker can be given some limited choices within their personal account. Index funds simply buy a portfolio of stocks to match some index — the SandP 500, for instance. No management of shares (trying to pick the winners and losers) is involved.
As a result, the TOTAL fees/costs are incredibly low. Study after study has shown that these management-free index funds on average outperform the actively managed (and much higher annual cost) options.
I walk the walk. My family’s IRAs are in such index funds. They incur a TOTAL cost per year of a tad over 0.05%. That’s ONE TWENTIETH OF ONE PERCENT. To give you some feel for the magnitude of difference, that’s ONE TENTH the CalPERS fees/management percentage of 0.51% – and that CalPERS figure likely doesn’t count the costs paid by the taxpayers for overhead for CalPERS, STRS, etc.
If the union bosses are intransigent on this management issue and INSIST that only a CalPERS-type agency control the investments (likely screwing and restricting their own union members), I can live with that — in order to get the 401k plans in place.
Sadly, I can guarantee you the unions won’t support a 401k plan under ANY circumstances. Taxpayer-guaranteed pensions are MADE for unions — the bosses can strong-arm politicians into giving away something today that doesn’t have to be paid for until many years later. Unions LOVE such Ponzi schemes, guaranteed by taxpayers.
But at least offering the “CalPERS management” option would demonstrate that the “good management” talking point of the union bosses is just a smokescreen thrown up to keep taxpayers on the hook for unfunded pension liabilities.