President Andrew Shepherd, in the film “The American President,” addressed the White House press corps and, among other things, offered the following about Senator Rumson, his likely opponent in the upcoming presidential election:
“And whatever your particular problem is, I promise you Bob Rumson is not the least bit interested in solving it. He is interested in two things and two things only: making you afraid of it, and telling you who’s to blame for it. That, ladies and gentlemen, is how you win elections.”
Unfortunately, fearmongering extends well beyond the election process. Over the last few years in particular, we have seen volumes of criticism leveled at public employee defined benefit (DB) retirement plans, with much of it being of the fearmongering variety. Given the general recognition that a retirement income security crisis is unfolding in the private sector, it seems a little odd that there appears to be considerable interest in undermining traditional public sector retirement plans and relegating public employees to the same unfortunate fate confronting an increasing segment of the private sector. I think this can be attributed to one of the fears I mentioned in Overcoming Fear! – Part 1. Specifically, “Defined benefit plan critics fear economic recovery will occur before they have a chance to put the last nail in the coffin of such plans.”
A recent favorite from the public defined benefit critics has been the observation that some public pension plans pay out more in benefits than they receive in contributions and then characterizing that as a red flag. The fact is, for a perfectly funded, mature defined benefit pension plan, that will be the common condition. You would never collect more than you need to pay out if you didn’t plan on paying more than you collect. The alternative would be the pay-as-you-go approach to funding where you collect in contributions exactly what is needed to meet pension payroll and have no income from investments—the $3 trillion-plus in reserve assets held by public defined benefit plans, and generating billions of dollars in plan revenue, did not come from the benefit fairy. The reason I have to believe this so-called “negative cash flow” criticism is nothing but fearmongering is that I also have to believe those economists who are leveling the charges actually know better—to think they don’t would suggest that they haven’t thought this through, and that’s just too scary.
So why have the critics resorted to fear tactics? Possibly because it’s easy—after all, making you afraid of an issue and telling you who’s to blame for it seems to work in many situations. Another possibility is that providing comprehensive, accurate information does not make a persuasive case for doing away with public sector defined benefit plans. As mentioned, there does seem to be a general consensus that, as a nation, we are headed for a retirement income security crisis, which highlights the failure of 401(k) plans to deliver even a subsistence level of income for private sector retirees. Given that reality, it begs the question as to why anyone would propose that equity should be achieved by eliminating the plans that, with limited high-profile exceptions, are efficiently and effectively delivering reasonable, yet modest, levels of life income to public sector retirees. Promoting a race to the bottom just does not make any sense.