Does Pension Reform Save Any Money?

Getty Images

You're going to hear much in the next week about the state budget, in advance of Gov. Jerry Brown's new budget proposal. But the real California political story of the month of January is likely to be how -- and whether -- to change the pension system for state and local public employees.

This debate will be cast by all sides as offering a wide range of choices -- from preserving the status quo to cutting out abuses to supposedly bigger shifts away from pensions and toward 401K-style accounts. But in reality, the debate is taking place in a very narrow range. None of the pension plans out there -- from the left to right -- offer much in the way of savings for state and local taxpayers.

This is true for two reasons. First, Brown's plan and other proposals from the left limit the changes to future employees. The benefits of current employees are barely touched. And since governments aren't doing much hiring (in fact, government employment is on the decline), there isn't much in the way of savings here.

What's striking is that even proposals on the right -- proposals being sold as ways to cut back on pensions and save money -- may not produce savings at all.

The non-partisan Legislative Analyst's Office found that two initiatives to switch new employees away from traditional pensions -- to supposedly less risky 401(k)-style plans -- could cost more money, by reducing the amount of cash coming into the system from new hires. That cash is needed to help cover the costs of paying pensions of current and retired employees. To make up that money, pension funds would have to shift their investments in ways that could lower earnings -- and force taxpayers to contribute more to the funds (journalist and pension expert Ed Mendel has a smart explanation of the potential problems here).

So there's a danger that this pension debate is much ado about nothing. Unless, of course, proposals are brought forth that would change the pension system in ways that would reduce obligations to current employees while preserving the system for future employees. That's tricky legally and politically. And as of today, there is no such proposal on the table.

Let us know what you think. Comment below, send us your thoughts via Twitter @PropZero or add your comment to our Facebook page.

Contact Us