Sacrifice - Defined Benefit Pension Plans

In the last 50 years the US of A has departed from the fundamentals of financial soundness and fiscal restraint with a devastating effect upon our wealth creation ability which leads to a lack of competitiveness which leads to a loss of good jobs and very poor economic growth. The solution to this malaise is not all that bad. If you have been following TheFundamentals you know that correction will come through frugality and sacrifice.

Lo and behold, someone spoke about “sacrifice” yesterday. Let’s follow up on the theme.

Mrs. Obama brought up the concept of “sacrifice” in relation to the efforts she and her husband and Oprah (the big o) are making to seal the deal with bringing the 2016 Olympics to Chicago. This scheme is indeed quite the teachable moment but we will only focus on “sacrifice” today and what real sacrifice would look like as part of correcting the American malaise. By the way, Mrs. Obama says that she and others are making their sacrifices because “funds are drying up” and our kids need to “engage in sports and learn how to swim and ride a bike.” We’re beginning to see why this gal got the big bucks working at a hospital.

Let’s use this moment to look at an opportunity for the Obama’s to lead in an arena where they have great familiarity – public sector employees (PSE’s) and their unions. Most all of these PSE’s participate in what are known as defined benefit pension plans (DBPP.) DBPP’s are the old fashioned plans wherein the PSE is guaranteed a specific defined payment upon meeting the requirements for retirement. In many cases these requirements are very generous (early retirement at a young age, big annual cost of living increases, minimal number of years of service to qualify, etc.) and therefore very costly to the employer. The employer in all these cases, be it a local, state or federal government, is us, the taxpayer. In a recent article, the Chicago Sun Times (a), one of Mr. Obama’s home town newspapers, pointed out that the cost to the taxpayers of Illinois for pension payments to PSE’s was $800 million per month! That means almost $10 billion per year in a state with an annual budget of $34 billion. http://www.state.il.us/budget/FY2010/FY2010_Budget_Briefing.pdf

So, what needs to be done? Get rid of defined benefit pension plans as soon as possible and replace them with defined contribution plans (IRA’s and 401k’s) just as has been done in the private sector which is the wealth creating area and the source of tax receipts. This change has to be priority number one in America. It is just that important!

Mr. Obama can lead and introduce the legislation at the federal level to immediately shut down the existing federal DBPP’s, have the actuaries calculate the reduced payments due employees at qualifying retirement dates and then introduce defined contribution plans (DCP) with a small, limited employer annual contribution of 2 or 3% of annual salary up to a certain dollar limit.

What about states and local governments you say? Well, the folks in Washington have figured out how to get states and local governments to go along with their plans. They frequently pass legislation that provides states with funding for certain programs if the state “voluntarily” goes along with one of those “do this” or “don’t do that” requirements. This way you can get around Article 1, Section 8 and the tenth amendment to the USConstitution. So, in the future, every time you pass legislation with federal funds going to the states, require that the funds only go to states that have done away with DBPP’s and have actually replaced them with DCP’s.

Some small sacrifices will produce major benefit to the competitiveness of the US and the children of the US will be the beneficiaries of this change. Perhaps the Obama’s can introduce this change on “the big o’s” show and have the mayor of Chicago, that great leader, start with his own home town.

(a) TheFundamentals has previously highlighted this series of articles and we encourage our readers to support the Sun Times for this excellent journalism. It is an example of the revelations that come from good research and reporting. Start at http://www.suntimes.com/data/1764213,pensions-illinois-database.article and http://www.suntimes.com/news/politics/1764823,CST-EDT-pension11.article