It’s time for The Discussion: Who will pay for the pensions?

6 Apr

Last time we discussed a Defined Contribution Pension Plan offered by the city of Irvine California. The city of Chico uses a Defined Benefits Pension Plan. What’s the difference? Plenty. Here’s a good read from Investopedia:

https://www.investopedia.com/ask/answers/032415/how-does-defined-benefit-pension-plan-differ-defined-contribution-plan.asp

The operative words here are “Benefits” and “Contribution”. Defined benefits means, whether or not business is good, the employee gets the pension they were promised. ” Defined-benefit plans provide eligible employees guaranteed income for life when they retire. Employers guarantee a specific retirement benefit amount for each participant that is based on factors such as the employee’s salary and years of service.

In California, the state retirement systems made “guarantees” they couldn’t keep – 70 – 90% of highest years’ pay with minimal to no contribution from the employee. ” Employees are not expected to contribute to the plan, and they do not have individual accounts. Their right is not to an account, but to a stream of payments.

In the beginning, CalPERS even told employers they didn’t have to contribute much of anything – CalPERS said they would make wise investments, and that would pay for these crazy pensions. That didn’t work out, so the employers – cities, counties, and public agencies all over the state – are on the hook for the pensions. And they are turning to the taxpayers like Mack the Knife. See, the contribution was never defined in this plan, so it’s whatever CalPERS demands. Like a junky on the street corner, they want it NOW!

On the other hand, the most common kind of Defined Contribution Pension Plan is a 401K. “Defined-contribution plans are funded primarily by the employee. But many employers make matching contributions to a certain amount .”

In Irvine, the city put up a little over 12% of salary. The employee is allowed to contribute whatever they want, and to control the investments. An interesting notation in that agreement is that the employee must wait 5 years before they are “100% vested” in the plan, meaning, they don’t get a full pension until they’ve proven to be a good and loyal employee.

And a DCPP is less risk for the employer. “As the employer has no obligation toward the account’s performance after the funds are deposited, these plans require little work, are low risk to the employer, and cost less to administer. The employee is responsible for making the contributions and choosing investments offered by the plan. Contributions are typically invested in select mutual funds, which contain a basket of stocks or securities, and money market funds, but the investment menu can also include annuities and individual stocks.

Both set-ups are risky for the employee. If CalPERS fails, and that’s looking more likely all the time, pensioners GET NOTHING. With a DCPP, the employee makes their own investments, if they aren’t market savvy, they stand to lose there too. But, given CalPERS’ track record, I can see where an employee would be wise to opt for a DCPP.

Why hasn’t the city of Chico (or the county of Butte, or any of the local gov agencies…) offered a DCPP? I think that’s a no brainer. The DBPP is more lucrative, as long as they can keep propping up the failing CalPERS. The most popular form of prop these days is the Pension Obligation Bond.

It’s time for The Discussion about who will pay for these outrageous pensions. Will the employees step up to the plate and do the right thing, or will council allow Staff to force the taxpayers to the wheel with new debt and higher taxes?

Next time, on This Old Lady and the POBs!

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