The most critical fiscal problem facing state and local governments is skyrocketing defined-benefit pension costs, which are squeezing out traditional services such as police, fire, schools, infrastructure, and libraries. One important policy reform needed in California is for state and local governments to switch employees to 401(k) retirement accounts going forward, a switch that most private-sector companies did years ago.
With 401(k)s, government employees own and invest their own retirement money. As with comparable private-sector plans, employees are guaranteed contributions from their employers, but not specific benefit amounts during retirement. So taxpayers can never be on the hook for funding gaps, because 401(k) plans are, by definition, always fully funded.
With 401(k)s, pension costs for government agencies are easier to project and control, making budgeting simpler and more transparent. If necessary, contributions can be adjusted based on economic and market realities.
Also, 401(k)s are a better recruitment tool for today’s mobile workforce, where employees typically stay fewer years with an employer and have more jobs during their careers.
The savings from switching to 401(k)s would allow current public-pension debts to be paid off more quickly — a vital step toward sparing future generations the pension pain too many are feeling today. The $6 billion in annual savings could be used to pay down the unfunded pension liabilities over about 30 years, assuming the pension funds hit their investment return targets.
Furthermore, if state legislators or local politicians think new revenue is needed to fully fund pension liabilities, one approach is to acquire additional revenue by selling surplus government-owned properties, and earmark the proceeds to pay pension liabilities. This approach of selling public-sector buildings and grounds has been examined thoroughly and could generate billions of dollars to backfill pension deficits.
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