Let’s get one thing clear before we comment again on the emotional topic of pensions. We like them.
A guaranteed stream of income in retirement is good for workers and good for the economy.
But we also understand why private companies have moved away from them. And we strongly support the efforts of House Speaker Will Weatherford to reform Florida’s state pension. He is aware of the growing risk to future taxpayers if no changes are made.
Reform of the state’s public pension is also a top priority of Florida TaxWatch, a think tank devoted to fair taxation and a healthy economy.
Although many observers say major reform is unlikely to happen this year, incremental improvements have support. One proposed change would give a financial incentive to new employees to join the state’s investment plan instead of the state pension.
That’s smart public policy because the investment plan comes without a future obligation. It’s pay as you go.
Florida’s pension fund is in excellent shape compared with many public and private plans. So why begin to back away from a good thing? Because of bad things happening elsewhere and the potential for them to happen here.
In Memphis, officials have used some of the money that should have gone to the city pension to pay for other things in the budget. State lawmakers there are considering ending the temptation to borrow from the future. The plan there is to force cities and school districts to pay 100 percent of true pension obligations each year.
One hundred percent would be a good goal for Florida, and it would be easier to achieve if the number of future beneficiaries can be reduced.
From Rhode Island we hear that the state “simply doesn’t have enough money, or ability to generate enough money, to pay the pretty generous pension benefits that past leaders have promised.”
Chicago’s pension faces a $20 billion shortfall. The Illinois Legislature is requiring city workers to pay more for pensions and accept smaller increases. City property taxes will also have to be increased. One news report observes that even those modest steps toward stability have “met with fierce resistance from unions and taxpayer groups.”
Florida leaders are aware of how easy it is to increase pension benefits and how difficult it is to rein them in or fully pay for them.
CNBC reports a warning from hedge fund Bridgewater Associates that public pensions are likely to achieve returns of only 4 percent, or lower.
If that proves true, then most public pension funds will be bankrupt in 30 years, and on the way down the drain they will be asking more from taxpayers.
Public pensions, on average, now need an investment return of 9 percent a year to meet their obligations, Bridgewater estimates. That could happen, but it’s not a safe bet.
Florida appears to need less than that. Its assumed rate of return is an average of 7.75 percent, and the fund is believed able to cover 86 percent of its liabilities. But the more conservative your estimate of future returns, the higher the liability appears to be.
Some 15 years ago Florida’s plan was more than 100 percent funded. The surplus proved to be irresistible to lawmakers.
The pension reformers in Tallahassee aren’t trying to strike another blow against mid-income workers, as some critics charge. The reality is that pension costs and risks are going up in ways hard to foresee.
It doesn’t matter that the benefits have been honestly earned if there is not enough money in the fund to cover them all. It is hard to argue that pensions should be protected no matter how bad things get for everyone else.
The best time to fix Florida’s pension is now, while the fund is strong and solutions are reasonable.