Wall Street Journal 20, 2010
The Christie Example
New Jersey government workers should have 401(k) plans instead of pensions.
New Jersey Governor Chris Christie has become the national pacesetter in state fiscal reform, and he's once again lighting up Youtube with his defense of taxpayers against the appetites of government-employee unions. The plan he announced last week to reform public pensions is crucial to saving the Garden State from economic calamity, but it falls short on one crucial part of long-term reform.
New Jersey has officially run up unfunded liabilities of $46 billion in its pension plan and $67 billion in its medical plan, though some estimates put the shortfalls much higher. Absent reform, the Republican Governor says the unfunded pension liabilities alone will explode to more than $180 billion over the next 30 years.
Most notably Mr. Christie's plan includes a rollback of the fraudulent 9% pension increase that triggered recent civil charges brought by the Securities and Exchange Commission. Without the money to pay for enhanced benefits, and unwilling to suggest even higher tax rates, legislators cooked the books in 2001 by pretending that the pension funds had more assets than they actually did, and therefore could cover larger payments. The fraud was repeated in various state bond offerings. Unions like to cast benefit hikes as sacred promises on the part of taxpayers. But in this case they are more accurately viewed as offenses that would draw prison terms if committed by anyone in private business.
Mr. Christie's plan would eliminate automatic cost of living adjustment (COLA) increases for both current and future retirees. And he'd raise employee contribution levels to the retirement plans and make it harder to get disability benefits, which have become a cottage industry of fraud. Other proposals include lowering the expected returns in the pension funds from 8.25% annually to a somewhat more realistic 7.5%.
When it comes to medical benefits, the Governor would provide state workers with a plan similar to what federal employees enjoy now—more options, but also more responsibility for paying the bills. State workers would pay 30% of health costs, up from an average of 8% now. Retirees wouldn't have to pay higher premiums but would accept higher co-pays.
Far from being onerous, these changes are consistent with current standards across private industry. The Christie plan would eliminate a major chunk of the state's unfunded liabilities, and for that he deserves kudos. And if he can convince today's legislators (most of them Democrats) to right the wrongs of their predecessors, he will justly earn the cheers of Garden State taxpayers.
But missing from the Christie proposal is the most important reform for the long-term: shifting government workers from pensions to 401(k)-style plans that have become the norm among private workers. This type of structural reform would prevent future politicians from simply repeating the mistakes of the past and returning to padding pensions when taxpayers are paying less attention.
Government pension systems are inherently flawed because the politicians who bestow benefits upon state workers are the same politicians who seek votes and campaign contributions from the unions representing these workers. When it's time to negotiate the benefits, the politicians and unions are often sitting on the same side of the table, facing no one representing the taxpayers.
As large pools of money controlled by politicians or their agents, pension funds are also magnets for corruption, with a history of pay-to-play scandals in various states. They allow ambitious politicians to use pension holdings in public companies not as levers to demand better returns, but as weapons to force shareholder money to serve political agendas.
Defined-contribution systems such as 401(k) plans create healthier incentives all around. Accounts are controlled by the individual workers, not pension fund bosses. Relying on the growth of their investment accounts to fund retirement, government workers have their interests aligned with those of private workers: Everyone wants a thriving economy.
Governor Christie has previously promoted the use of 401(k)-style plans for government workers, but Democrats resisted and he apparently concluded the cause is hopeless. But other states have introduced such programs in gradual fashion, say, for new hires, or perhaps offering a hybrid plan of a limited pension combined with a 401(k). By dropping the issue without a fight, Mr. Christie has given away too much even before the unions get to the table.