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Pension Reform Now

Growing Problem

Unsustainable public sector pensions are a problem spanning the country. Many municipal governments, including those in Florida have promised to pay their retirees more money than they have set aside to make those pension payments.

Governments are not held to the same level of oversight as private firms that offer pensions, and it is tempting for governments to shift the present cost of government into the future by offering generous pension benefits in exchange for current compensation changes. Even municipal governments in cities that have been responsible stewards of their pension programs are subject to the same incentives to pass their current costs forward in the form of underfunded pension liabilities.

Local officials in these municipalities often find that state mandates have limited their options in dealing with pension problems. These limitations include statutes dealing with insurance premium tax dollars that currently encourage additional benefits rather then paying the bill for current pensions.

A number of costly abuses in the current pension system have been identified. They include “spiking,” a practice wherein government employees nearing retirement use overtime and accumulated payouts for benefits such as sick leave to increase the total annual compensation in the year or years on which their pension will be based.

Solutions Offered

Our long-term problem can be addressed by encouraging local governments to place all new employees in 401(k)-style “defined contribution” plans rather than General Motors-style “defined benefit” plans, and to encourage current employees to convert to defined contribution plans as well. This would help ensure that the present costs of government are funded in present budgets.

If municipalities want to offer defined benefit plans, they should be encouraged to offer them through the state government’s Florida Retirement System; this can be encouraged by removing the disincentives that currently discourage municipalities from entering — or re-entering — the FRS.

Recommendations include:

1. Make the Investment Plan the Default Option for New Hires – By simply switching the default option for new state government hires to a defined contribution plan instead of the current defined benefit plan, we can alleviate costs to the employee, as well as the state.

2. Limit Employee Switching Between Plans – Currently, employees enrolled in FRS are allowed to switch between the plans offered once at any time in their career. By limiting switching to the first year of employment, we can ensure that the system is not unfairly exploited while also allowing FRS enrollees a chance to pick the best plan for them.

3. Lengthen the Pension Plan’s Vesting Period to 10 Years – With almost 700,000 people enrolled in the FRS and with Florida facing such tough economic times, it’s more important than ever to safeguard the system that sustains thousands after retirement. By increasing the vesting period for employees in the pension plan to 10 years from 8, we can ensure that those who put in the most get the most out.

4. Apply These Reforms to Municipalities – These sensible reforms would be beneficial to the sustainability of municipal pension plans not enrolled in the FRS.

Sustainable Pensions for All

Sustainable public sector pensions are beneficial to all Floridians. If localities are forced into budget cuts or — worse — into bankruptcy, vital public services may be eliminated and pension payouts could cease.

Florida should learn a lesson from other states that now face pension crises, rather than waiting until that happens here.