Governments have been slower than private industry to retire old-school pension systems and replace them with the public equivalent of 401(k)s. The Great Recession and a slow recovery are helping force that change.
A report beginning today in The Atlanta Journal-Constitution details just how underfunded many area public pension plans really are.
Declines in both tax receipts and pension fund investment performance have made the old way of retirement unaffordable. Defined-benefit pensions that send regular checks to retirees are on the way out for both public- and private-sector workers. Public employees will increasingly find themselves in 401(k)-type plans similar to those owned by the taxpayers who pay their salaries.
The need to gain fiscal control over pension liabilities has left governments with no other viable choice. It’s either reduce costs now or keep kicking a growing ball of debt into the future.
Although pensions are precariously funded across the metro area, the city of Atlanta provides an instructive snapshot of the challenge faced by political leaders nationwide. Mayor Kasim Reed noted this month that Atlanta’s $125 million in pension payments last year didn’t put even one dollar toward unfunded liabilities. That way of doing business is unsustainable.
Reed recently announced two proposed options for pension reform. They are indeed a game-changer for workers who had expected a traditional pension in retirement. Switching to a 401(k)-like system is inevitable, given both the national trend and enduring anti-tax sentiment.
Reed’s audacity in daring to hop onto the political third rail that is public-sector pensions is noteworthy. The City Council should join him in doing the hard, and right, thing by making needed changes.
Some argue public-sector pension reforms are a disservice to workers — many of whom risk their lives or health each time they don their uniforms. But while turning away from defined-benefit pensions is a big step, it’s not one that would automatically sentence public servants to a poor retirement.
Workers who have already qualified for pensions would receive what they’ve earned up to a “freeze” date. After that, they would join a defined-contribution plan, perhaps supplemented by Social Security, which is now off-limits to city workers.
Using option 2 in Reed’s proposal as an example, workers now earning less than $39,856 annually and who sign on for Social Security would see the city pay an amount equal to 6.2 percent of their salary into the federal system. Employees would also contribute 6.2 percent of pay. The city would then match up to another 8 percent of wages routed into personal retirement accounts.
At maximum contribution levels, workers would be setting aside a sum equal to 28.4 percent of annual pay. That’s a sizable cushion above the mid-teens savings percentage often cited by experts as being necessary to provide a comfortable retirement.
Even during big market downturns, setting aside at least 15 percent of pay over time should yield a workable retirement.
Giving workers more responsibility for their financial success only works, though, if agencies redouble efforts to educate and inform employees about prudent investment choices. A portfolio suitable for a youngster decades from retirement is likely a foolhardy choice for a worker within reach of a gold watch and farewell dinner. Employers must make sure workers know the difference.
We’re all facing the reality that paying for retirement will be tougher than most of us envisioned. Increasingly, making the numbers work falls to us as individuals.
Good programs, good advice and diligent saving will make this tough task easier.
Andre Jackson, for the Editorial Board
Atlanta Forward: We look at major issues Atlanta must address in order to move forward as the economy recovers.
Look for the designation “Atlanta Forward,” which will identify these discussions.
