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Reading New Pension Report So You Don't Have To

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If you don't know what the state's Little Hoover Commission is, now is the time to learn. This public body studies important state issues and issues reports and recommendations on how to fix them.

The latest report from Little Hoover arrived this week. It's on pensions, and you'll be hearing a lot about its findings for some time. To read the whole thing (or an executive summary), go here. If you don't have time, here are three big highlights:

1. Most previous pension reform proposals would make changes only to new public employees, because promises to current employees have the force of contract law and the state constitution behind them, and thus can't be changed.

But Little Hoover says that the pension crisis can't  be addressed -- and that government will be "crushed" -- if changes aren't made to the current system. In this area, the commission suggests a freeze of the current system and new legislation that gives "state and local governments the authority to alter the future, unaccrued retirement benefits for current public employees." That's convincing, given the budget and pension math, but such legislation would start World War III with public employee unions.

2. California should adopt a new public pension system that is a hybrid of a less generous but traditional pension (which provided a guaranteed benefit for retired workers) and a 401K account (which provide only a guaranteed contribution on the front end).

This is an interesting proposal and the devil is in the details. 401Ks, as anyone who has had one in recent years now knows, do not necessarily give you the feeling of retirement security. The commission promises aggressive management of 401Ks, though it's not clear by whom. Another concern: two-tiered pension systems have proven to be politically sustainable in the past, and often revert back to more generous, one-tier systems when good times return.

But the principle here is right: preserve the retirement security of pensions, but set the guarantee at a lower amount. 

3. The system should be transparent and the same for everyone. The report is very strong on the need to make the pension system simpler, eliminate special deals that allow employees to spike pensions and governments to take holidays from making pension contributions, and make the whole system transparent. One recommendation: all pension increases must be approved by voters.

These recommendations move California in the right direction, but there's something missing in the report. That's the connection between the pension crisis among public workers (of unsustainably generous pensions) and the different retirement security crisis for the rest of us (that we don't have retirement savings and that the stock market and housing are not reliable producers of the money we need to retire).

Policymakers should think bigger than this report, and try to build a public pension that provides security, makes very conservative investment assumptions -- and ultimately is low-risk enough that private workers and employers would be invited to be a part of it. Retirement security can't be just the preserve of public workers. 

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