Governments Should Scrap Pensions And Go To 401Ks

The following was sent to the Mount Dora city council, but it pertains to many political subdivisions including Omaha, Nebraska where I also reside.

Overly generous plans, investment losses, and optimistic investment assumptions have resulted in underfunded plans and the possibility of tax increases. The problem exists in most public bodies and needs to be addressed. At this point it will only cause interested parties to dig their heels in if the discussion centers on how we got here and who the advocates were. It's enought to know that the city's pension obligations are seriously underfunded and have been growing much faster than the cost of living. If not resolved, the impact on Mount Dora will be higher taxes and a larger percentage of city revenues devoted to retirement expense and less to other areas. Before I opine too grandly, at least some background. Before retirement I was president of two commercial banks and owner of several businesses with several hundred employees. I'm a Mount Dora citizen and spend over half the year in our fine city. My companies didn't have defined benefit pension plans and neither did any of our competitors. They became relics 25 years ago. Business didn't abandon the defined benefit plans to reduce employee comfort in retirement, they eliminated them to reduce risk of the unknown, including poor investment performance, poorly written plans, and employee abuse. Private business, except for some huge companies, has moved to a 401K match approach. The employer still contributes a large amount of retirement money and the employee controls his own retierment investments. The risk of poor performance stays with the employee and there are no plan loopholes to abuse. The employee owns and controls the assets and can pass any remaining investments to his/her heirs. I think the city should move in the direction of a defined contribution plan, 401K-ish, which would allow more accurate budgeting and consistent taxation. We can't use a mulligan on past errors or mistakes, so employees are due what is accrued. But we can end the plans, provide an equivalent annuity for what the employee has earned to date, and start a defined contribution plan. Let's cap our exposure and not count on outsized investment gains to bring us back into a funded position while continuing to accrue benefits at a rate that far exceeds the inflation rate. I hope this is of some value as you discuss the issue and manage the city's finances.