Researcher: Switching Metro Employee Pension Plan Will Increase Cost to Taxpayers

Research organization projects higher cost, fewer benefits if city changes pension plan

Researchers specializing in public and private sector retirement systems testified that switching Metro employees’ retirement plan from a pension to a 401(k) type program could cost taxpayers more money while also putting at risk the retirement security of thousands of Middle Tennessee families.
 
Ilana Boivie, Economist and Director of Programs at the National Institute on Retirement Security, testified before the Study & Formulating Committee on Thursday about the multiple studies NIRS has conducted on public and private sector retirement systems across the United States.
 
“Our research shows that switching from a well-managed, actuarially sound defined benefit pension - like what Metro employees have now - to a defined contribution plan like a 401(k), results in higher costs in the short and long term,” Boivie said.  “The efficiencies in a pension plan enable them to deliver the same benefit for about half the cost of individual DC accounts,” Boivie reported to the Committee. “This is because 401(k) accounts do not have longevity risk pooling and typically have higher fees and lower returns.”
 
A defined benefit (“DB”) plan is commonly referred to as a pension. A defined contribution (“DC”) plan is commonly known as a 401(k), or, in the public sector as a 457 plan. According to NIRS research, DB pensions allow older Americans to be more self-sufficient in retirement, they fuel local economies, and they’re an important human resource tool for employers.
 
According to Boivie, data shows that many public pension plans weathered the Great Recession and that employees would rather have a DB pension instead of a 401(k) when given a choice. “Pensions provide stability, which is important to employees” Boivie said. “Even younger employees who often want flexible and portable retirement options seem to prefer a stable, secure pension rather than a DC plan.”
 
Pension plans also are very effective at reducing retired Americans’ dependence on public assistance, NIRS found. “Multiple studies have shown that people who receive pension benefits are much more likely to be self-sufficient in their elder years,” Boivie said. “In 2006 alone, our research shows that taxpayers saved nearly $7.3 billion in public assistance because retirees were receiving a pension benefit.”
 
Currently, vested Metro employees receive a defined benefit pension and are offered an optional 457 defined contribution plan that they are responsible to fund on their own. Metro employees have not received merit raises or cost of living raises in five years.
 
Boivie was emphatic that savings and efficiencies don’t just happen on their own. “Cities and states have to properly fund their pension, pay into the fund consistently and responsibly, and make sure that cost-of-living adjustments (COLA’s) are actuarially sound. Luckily, Nashville has been very diligent in managing its pension plan.”
 
Boivie explained the unfortunate trend during the last decade for private sector employees whereby many employers moved their employees into a 401(k) plan. The experiment has not worked well for many workers, nor has it worked in the few states that have implemented DC plans. “West Virginia is one recent example of a state that decided to move its employees back into a DB pension after the DC plan was found lacking,” Boivie said. “Putting teachers into a defined contribution plan did nothing to reduce the state’s unfunded liability, and offered poor returns to employees. As a result, the state put all new employees back into the pension plan. Now, West Virginia is actually projecting a savings of $1.2 billion over 30 years by switching back to a pension.” A similar story happened in Nebraska, Boivie noted, and in Alaska, after the state moved new employees into a DC plan, they found that costs in the existing pension plan rose.
 
“Moving away from a pension to a 401(k) has increased costs to taxpayers, it has not addressed the unfunded liability issues that concerns legislators, and it almost always angers employees,” says Doug Collier, President of SEIU Local 205, which represents Metro government and Metro Schools employees. “The way to address unfunded liability issues is to make improvements within the pension system, not to leave the pension system altogether.”
 
The National Institute on Retirement Security is a nonprofit, nonpartisan research organization based in Washington D.C. whose mission is to contribute to informed policy making by fostering a deep understanding of the value of retirement security to employees, employers, and the economy as a whole. Boivie was invited to Nashville by the Service Employees International Union, Local 205 and the International Association of Firefighters, Local 140. For more information on NIRS and their research, go online at www.nirsonline.org.