Keep defined benefits for Houston city employees

As City Council works with Mayor Sylvester Turner on addressing Houston’s pension fund issues, they should ignore calls from the Houston business community to adopt 401(k)-type plans.

Yes, nearly the entire private sector uses 401(k) plans. Those plans focus on achieving business objectives, like minimizing a company’s contribution to employees’ retirement funds and retaining flexibility for corporate buyouts or mass layoffs. Mostly, they shift investment risks from companies to employees. They are a win-lose in the company-employee equation.

And just because businesses use them does not make 401(k)s the best policy. Their advocates never discuss private sector employees’ poor retirement prospects, or the how those plans have worked in other states.

A growing body of evidence indicates disturbing trends. After years of difficulties with markets and investments, private sector workers feel financially unprepared for their golden years. Nationwide, people average only about $91,000 in their IRAs and 401(k)s. This is far short of the amount needed for a comfortable, secure retirement. People are responding by working longer. A recent Insured Retirement Institute survey indicates that 58 percent of people 34 to 53 said they planned to retire at 65 or later, compared with 42 percent who said the same in 2011.

And consider the track record of 401(k)s in states that try them. In 1991 West Virginia closed the traditional defined benefit plan of its Teachers’ Retirement System to new employees as a response to severe underfunding. The move didn’t work: 14 years later the pension’s funded level was 25 percent. Those teachers forced to enroll in the 401(k) were unable to retire: only 1 in 10 had more than $100,000. The state reversed course.

Similarly, in 2005, Alaska faced a $5.7 billion unfunded liability for its public employees’ and teachers’ defined benefit plans. It pushed all new employees into 401(k)s. The legislators, however, continued to find spending “priorities” other than its defined benefit plans. Today, the systems’ total unfunded liability of $6.7 billion is worse than it was.

We understand the business community’s advocacy of 401(k)s for the public and private sectors. From a competitive perspective for workforce talent, they would prefer all prospective new hires to have only one option for retirement benefits. Diverse, competing retirement plan structures work better for the economy.

Before the oil boom went bust, cities around Texas could not find replacements for police and firefighters who wanted to retire. Thankfully, they were able to retain older workers because of their defined benefit plans. They saved money by not having to compete with the $100,000+ salaries being paid to new-hire oil field workers. After the bust, the cities now have abundant new recruits — at much lower municipal salary levels. Or take the example of rapidly growing North Texas cities. A young person interested in public sector work might start at a low-paying small city, absorb specialized training, and then move to a larger city for only a slight bump in salary, but better pension plans. They — with their training — remain in the public sector.

Every government organization with unfunded liabilities for their defined benefit plans probably has a history of underfunding by their sponsor. It doesn’t have to be that way. After years of shortchanging its teachers’ and employees’ defined benefit systems, the Texas Legislature made significant contributions to make them more healthy in the previous two sessions. The fire and police pension fund in San Antonio is an example where a 30-year commitment to level funding has helped the city maintain its AAA bond rating. And that pension fund only has $220 million in unfunded liabilities. Healthy defined benefit retirement plans can be achieved.

Mayor Turner is on the right track in looking across the entire city budget for places where spending might be adjusted to support Houston’s pension funds. Public and private sector retirement plan policies should do their best to generate a secure retirement for all employees. Otherwise they risk growing public welfare rolls with those who do not have adequate financial resources when they end their work careers.