Barro: RI came closer than most but didn’t fix pension problem

December 4th, 2012 at 5:00 am by under Nesi's Notes, On the Main Site

There’s been a lot of pension triumphalism in Rhode Island since the overhaul of the state system masterminded by Treasurer Gina Raimondo was enacted by Governor Chafee and the General Assembly.

Josh Barro, a policy analyst at Bloomberg View, acknowledges that Rhode Island’s pension law is “the most aggressive reform of recent years.” But in a recent National Affairs article, he argues that even its “bold” changes “will not do enough to place the state’s pension system on sound financial footing.”

“Rhode Island still hasn’t been able to overcome the fundamental problems plaguing its pension system,” Barro writes, arguing that the Ocean State “came closer than any other state to success, and yet still couldn’t quite manage it.”

The heart of Barro’s critique is this: by keeping part of the pension plan as a defined benefit – a fixed annuity that’s paid regardless of actual investment returns – the new law still leaves taxpayers facing a significant risk if lawmakers don’t fund the system.

That critique would apply not only to Raimondo’s hybrid system but also to Providence Mayor Angel Taveras’s settlement, which keeps the traditional defined-benefit system in full and counts on future mayors and city councils to act responsibly if the city is to avoid another solvency crisis someday.

Here’s Barro:

Today … Rhode Islanders are in a mood for pension austerity, and further giveaways would not be popular (or affordable). But the fact that the state’s pension system has retained some part of its defined-benefit structure means that some day in the future — when the political and economic climates have become more favorable — legislators may well make unaffordable promises again. The very design of the system encourages such irresponsible behavior in good times, setting states up for yet more fiscal crises when the economy takes a turn for the worse.

In Barro’s words, “the underlying cause of the state’s pension problems has not been dealt with, and the potential for future mismanagement and funding problems remains.” In addition, he notes that the new system isn’t much cheaper than the old even one (although it’s costs are more predictable) and that the 36 locally run pension plans weren’t fixed.

Defenders of defined-benefit pensions counter Barro’s arguments in a number of ways.

First, as Raimondo and Boston College’s Alicia Munnell emphasized last year, the nationwide shift from defined-benefit pensions to 401k defined-contribution retirement plans has left many baby boomers without enough savings – in Raimondo’s words, they lack “retirement security.”

Second, defined-benefit plans are cheaper to administer than defined-contribution ones, according to economist Dean Baker: “This is a way to give a benefit that is of great value to workers (a guaranteed pension) at little cost to the state. I can’t see why it would want to throw this away.”

The problem with those arguments, Barro said in a WPRI.com interview last year, is that “defined-benefit pensions are basically a structure with which state lawmakers cannot be trusted. They involve making promises over periods of decades. They involve state lawmakers now making decisions for political benefit, and being able to send the bill to people who will be in office far in the future.”

In fairness to Rhode Island’s leaders, they didn’t ignore the risks outlined by Barro. (More on that in this post.) In the meantime, it’s possible all sides could unite behind at least one of the proposals in his article – changing federal law to force state governments to fund their pension plans:

With the enactment of the Employee Retirement Income Security Act (often referred to as ERISA) in 1974, the federal government started forcing private firms that offer defined-benefit pensions to maintain adequate funding ratios. …

The effect of ERISA was to make private defined-benefit pensions much more secure, but also more rare — a crucial point for the cause of state pension reform. While 38% of private-sector workers participated in a defined-benefit pension plan in 1980, the figure in 2008 was just 20%. Forced to incur the true cost of securely funding pension plans, many companies have chosen to abandon them in favor of 401(k) plans or similar defined-contribution models. The appeal of requiring states to abide by similar requirements is not just that they would no longer be able to shirk their obligations, but also that such requirements would make the advantages of defined-contribution pensions far clearer.

• Related: Barro: ‘Lawmakers cannot be trusted’ with today’s pension system (May 27, 2011)

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13 Responses to “Barro: RI came closer than most but didn’t fix pension problem”

  1. Pat Crowley says:

    I think Barros has it exactly backward. Define benefit plans ideal benefits for political environments because they are SUPPOSED to be immune from politics and short term market pressure.

  2. Jeffrey J Brown says:

    Mr. Crowley. Please do tell how how the RI state defined benefit plan through which many of your members are participants, functioned independently, i.e. immune from politics when over the past 30 years numerous legislative enhancements, i.e. COLA, enhanced service credits, removal of minimum retirement age, etc. where enacted by the General Assembly, nevermind none being the result of an actuarial study.

  3. Al Moncrief says:

    COLORADO COURT OF APPEALS CONFIRMS COLORADO PERA PUBLIC PENSION COLA BENEFITS AS CONTRACTUAL.

    The Colorado Court of Appeals has reversed and remanded an initial District Court ruling that denied the contractual status of public pension COLAs in Colorado. The Court of Appeals confirmed that Colorado PERA pension COLA benefits are a contractual obligation of the pension plan Colorado PERA and its affiliated public employers. A huge victory for public sector retirees in Colorado! The Colorado Legislature may not breach its contracts and push taxpayer obligations onto the backs of a small group of elderly pensioners.

    The lawsuit is continuing. Support pension rights in the U.S. by contributing at saveperacola.com. Friend Save Pera Cola on Facebook!

  4. Bob says:

    Pat’s funny; ‘….SUPPOSED to be immune from politics’…really? Jay Leno himself couldn’t have made that line funnier!

  5. [...] pension law was a section called the Rhode Island Pension Protection Act, which aimed to tackle the concerns highlighted by defined-benefit critics such as Josh Barro, and which won praise from Rhode Island AFL-CIO President George [...]

  6. [...] 12. RHODE ISLAND NEWS: “Barro: RI came closer than most but didn’t fix pension problem,” by Ted Nesi (_WPRI.com_, December 4, 2012, Blog). blogs.wpri.com… [...]

  7. robert benson says:

    And Bob Walsh, Pat Crowley’s puppeteer, says the state claim that Taft -Carter has a conflict of interest because she might rule in a case involving her son, mother and uncle, is a “panic” move (Sunday’s ProJo).

    I say Walsh’s call for a negotiated settlement for state workers and teachers is a panic move because he knows the unions will lose. If the U.S. Congress in 1984 could force federal workers into a “hybrid” pension plan very similar to the one for new RI state workers and teachers , then the RI legislature can do the same thing. That called a precedent, in case you union wizards have never heard of one.

    The reason we have a huge unfunded liability ($10 billion) at the state level in RI today is that our own lawmakers waited so long to do it in RI. Why, because they operate under the thumb of the Bob Walsh’s and Pat Crowley’s who turn out the voters for them every 2 years and the rest of the state be dammed.

  8. [...] Related: Barro: RI came closer than most but didn’t fix pension problem (Dec. [...]

  9. Tough Love says:

    Quoting …”First, as Raimondo and Boston College’s Alicia Munnell emphasized last year, the nationwide shift from defined-benefit pensions to 401k defined-contribution retirement plans has left many baby boomers without enough savings – in Raimondo’s words, they lack “retirement security.”

    That’s hardly a reason or justification. You can’t cure “stupidity” (one’s refusal to “save” for retirement).

    Quoting …”Second, defined-benefit plans are cheaper to administer than defined-contribution ones, according to economist Dean Baker: “This is a way to give a benefit that is of great value to workers (a guaranteed pension) at little cost to the state. I can’t see why it would want to throw this away.””

    “Little” cost to the State (meaning Taxpayers) ??? Are you kidding ?

    Barro is right on the money when he says …”The very design of the system encourages such irresponsible behavior in good times, setting states up for yet more fiscal crises when the economy takes a turn for the worse.”

  10. art says:

    By my observation, when you add state and city workers and teachers together, and then add their immediate family, it is possible that the active working people in RI have more govt/ed workers than private sector. As far as pay and benefits go, there is no contest. So many employed in vacation ares paid peanuts that the majority of income and vast majority of benefits are paid by govt or education. It is actually in the personal interest of the majority of people for the state to go broke as long as they get theirs. Weird but in my little circle of infuence true

    1. Tough Love says:

      What the recipients of these rich public sector pensions don’t seem to understand is that the workout from insolvency will most certainly include significant reductions to their pensions.

  11. eatingdogfood says:

    Democrats + Unions = BANKRUPTCY !!!

    1. We're Doing God's Work says:

      Jerk + Republican = STUPID !!!