Last November, Rhode Island slashed its unfunded liability for public-sector pensions by reducing the size of benefits and creating a new hybrid retirement plan. Should Treasurer Raimondo also have used the opportunity to open up the Employees’ Retirement System of Rhode Island to all the state’s citizens?
That’s the opinion of Teresa Ghiladucci, an economics professor at the New School and a prominent voice in the nation’s debate over how Americans should finance their retirements.
In a New York Times op-ed bemoaning private-sector workers’ insufficient 401(k) savings, Ghiladucci argues “states could save millions of workers from impending poverty by creating public pensions for everyone”:
[The] plans would use the same professional staff and institutional money managers that invest the state and city pension funds to manage contributions made by participating employers and employees in the private sector.
This is a vital step: public pension plans usually outperform 401(k) plans and individual retirement accounts, because instead of a single worker managing a single account, large institutional plans pool workers of all ages, diversify the portfolio over longer time periods, use the best professional managers that aren’t available for retail accounts and have the bargaining power to lower fees and prioritize long-term investment.
By some estimates, costs for public pensions are over 45 percent lower than for individual 401(k) plans. Of course, since these plans would be financed by workers and their employers, there would be no cost to taxpayers.
Ghiladucci highlights two proposals elsewhere along the lines of what she’s thinking, one in California and another in New York City. The Golden State proposal calls for the state treasurer to oversee a voluntary, portable retirement savings plan with a contribution rate of about 3%. CalPERS would manage the money, and retirees would receive a small defined-benefit pension based on how much money they saved.
Darrell Steinberg, the Senate president pro tempore, said his proposal reflects a dynamic in the pension debate that will be familiar to Rhode Islanders. “The debate in society is ‘Why should some folks get a [traditional pension] when the majority no longer do?’” he told the Los Angeles Times. “This asks a different question: ‘Why shouldn’t we strive to bring everyone up to a reasonable and decent level of retirement security?’”
A state survey last year found 51% of Rhode Island employers offer a retirement plan to full-time employees and 22% offer one to part-timers. The vast majority of large employers (85%) offer full-time workers a retirement plan, compared with 42% of companies with fewer than 20 workers. Self-employed individuals are on their own.
Update: Turns out Tom Sgouros made just such a suggestion [pdf] back in 2005.
(photo: IAFF Local 732)