I have a rule: I never require myself to answer hypothetical questions. At the end of the day, they’re just hypothetical and the answers don’t count for a thing.
But, with today marking the 40th anniversary of the passage of ERISA, it is tempting to consider just how different the pension landscape would be if the legislation had applied to public plans, too. Early drafts covered public as well as private sector plans, so it’s not a completely unrealistic idea.
As many other 40th-birthday pieces will no doubt note, ERISA made significant improvements to the private sector system in many respects, improvements that today we take for granted: fiduciary standards to protect against expropriation of assets; vesting and non-discrimination rules to protect rank-and-file workers; the exclusive benefit rule and self-investment limits to prevent sponsors from using plan assets for corporate purposes. Few would argue against those changes and they have largely been adopted for public plans, too.
But ERISA also put a focus on benefit security (subsequently strengthened by PPA) and in doing so led to a decrease in DB coverage. That is one of the reasons that, today, it is defined contribution rather than defined benefit that is the most common form of retirement plan in the private sector. Only a minority of employers choose DB.
Hence, many in the public sector are no doubt glad that their predecessors were successful in their lobbying efforts in the early 1970s, and that public plans were excluded from the scope of ERISA. But typical funding levels compare poorly to the private sector, and benefits are hence less secure. The public sector has taken a different route, and faces different challenges as a result.
Although the two systems have taken very different paths since 1974, at the heart of both sets of challenges lies the same issue:
Good pension provision is expensive. And the stronger the guarantees, the more expensive it becomes.
Let’s be clear: however you choose to address the question of funding, you cannot legislate away the fact that good pension provision is expensive. You cannot legislate away the fact that guarantees cost money, and the cost is often felt at the times you least can afford it. You cannot make pension provision cheaper by ignoring, denying or disguising the cost: chickens come home to roost eventually.
And, while costs can be reasonable in favorable market conditions, there will also be periods when markets are not favorable. The plan sponsor feels the pain at those times. Hope, as the old saying goes, is not a strategy. Indeed, the good times may simply serve to set up problems in the bad by creating unrealistic expectations about what is possible.
Any pension system—public or private—faces trade-offs between affordability, the level of benefits promised, and the security of those benefits. You have to pick your poison.