In a recent Iowa View essay in the Des Moines Register, Josh Mandelbaum wrote that Republican proposals to move the Iowa public employee’s pension plan (IPERS) away from a defined benefit plan and toward a defined contribution plan are, “ideologically driven”. If by that term he means an ideology under which employee pensions should be financially sustainable and fair to both employees and taxpayers, then count me as ideologically driven also… and that’s a good thing.
In our political/government employment environment, defined contribution plans have mostly been significantly underfunded and unsustainable. In an actuarially sound defined benefit plan, the balance in the fund should have a surplus as often as it has a deficit. But, as we have seen in the past, when there appears to be a funding surplus, politicians increase benefits rather temporarily lowering the contributions paid by both taxpayers and employees. There is a built-in tendency for politicians to over-promise and under-fund because future benefits will not be paid out until many years later. Supporters of the current IPERS system like to say that Iowa has one of the most financially sound retirement systems in the U.S. IPERS is only about $7 billion short of the funds necessary to keep its promises! It has only about 81 cents for each dollar that it owes.
Defined contribution plans can have most of the same benefits, and potentially more, for employees. It does shift significant responsibility and risk to the employee to invest wisely and to not spend retirement money too fast during retirement. But, under a defined contribution plan the employees own the money in their retirement account, and can take it with them if they decide to change employers, and can leave it to anyone they wish after they die.
There will be a significant fiscal challenge that must be met if we were to make the change from a defined benefit to a defined contribution plan: If new employees put their retirement contributions into a defined contribution plan and don’t contribute to the existing defined benefit plan, the already-existing $7 billion of under-funding of IPERS will come due and need to be paid out over the next 50 – 60 years. In a big way, IPERS is still operating like a giant Ponzi Scheme – taking money from new investors to payoff old investors. (Illegal if done in the private sector.) It is time for us to lock-in the under-funding liability and stop making it worse. We need to put new government employees into a defined contribution plan.