Sen. Rodney Tom has introduced a bill that would shift new hires and younger workers to a defined contribution pension system, similar to the 401k plans common in the private sector. Here's how the bill report summarizes it:
The Washington Public Employees Savings Plan (PESP) is created as a new defined-contribution plan to replace PERS, TRS, SERS, and PSERS Plans 2 and PERS, TRS, and SERS Plans 3 for all employees first hired in an eligible position on or after July 1, 2014, and for all current members of those plans who are under age 45 as of July 1, 2014.
Members of PESP must contribute to their defined contribution accounts at a rate equal to 5 percent of salary up to age 35 and 7.5 percent beginning at age 35. Employers must contribute to members' accounts at a rate equal to 80 percent of the employee contribution rate. Members with less than five years of service are not vested in employer contributions and the earnings on those contributions.
Predictably, the proposal sparked immediate opposition from the Washington Federation of State Employee. Regardless, change is coming, though possibly not this year. The Research Council has long warned of the need to restrain compensation costs.
In 2006, in Can We Afford Their Retirement?, we examined the state's various retirement systems and growing liabilities. Our conclusion:
Coupled with changes in accounting standards and workforce demographics, the rising cost of retirement has led many private sector employers to reduce benefits. But public employers have been reluctant to follow suit, despite the diminishing difference between public and private sector salaries. And while continuing to provide these benefits, state and local governments have failed to properly account for and fund obligations. The resulting liabilities threaten to squeeze public budgets for years to come.
...While public employees provide a valuable service, and while government should strive to maximize the effectiveness of plan provisions, the focus needs to be on cost containment. Past mistakes cannot be allowed to worsen. It is time for lawmakers to balance benefits with budgetary realities.
In 2010, our Thrive Washington report on budget sustainability recommended:
Create a defined contribution plan for all new employees. The state could use the approach that universities in Washington use for faculty and professional staff. Enrollees put an escalating percentage of their salary into the plan as they age and benefit from an employer match, a full range of investment options, complete portability and access to life-cycle options after retirement. Defined contribution plans also increase budget stability and predictability. With defined benefit plans, employer contributions fluctuate with investment returns, increasing taxpayer risk.
Across the country, state and local governments have been reforming their pension systems, although as this 2010 NCSL study reports, most states still offer defined benefit plans. Washington in 1998 offered a hybrid "Plan 3." Last September, a report published by the Center for State and Local Government Excellence, noted the shift to defined contribution plans. The Center did not recommend a change to defined contribution plans, but rather analyzed their increasing importance in the public sector.
In 2012, according to the National Conference of State Legislatures, seven states adopted "sweeping structural pension reforms." All acted to control costs and increase employee responsibility. Just today, the Tennessee state treasurer recommended phasing out that state's defined benefit plan.
There are legitimate concerns associated with the transition, including the need to protect the integrity of the current plans when new employees no longer make contributions. We need to understand better how these concerns will be addressed. Ultimately, however, the days of the traditional defined benefit programs are numbered. The debate here is overdue.
UPDATE The Seattle Times reports on today's Ways and Means hearing on Tom's bill. Outlook bleak, for now.