I recently become aware of a most "urgent" issue that is "necessary for the immediate preservation of the public peace, health, or safety" -- one of them, no one is sure which -- of the state of California. Governor Jerry Brown proposed a few minor reforms to the state pension system. What makes these reforms so urgent? The reforms can apply to the upcoming fiscal year if he says they're urgent and the Legislature passes them. It's a little bit of unprincipled legislative trickery for The Greater Good.
There are seven proposed reforms which I'll list followed by my five-minute analysis.
1. Eliminate Purchase of Airtime. Would eliminate the opportunity, for all current and future employee members of all state and local retirement systems, to purchase additional retirement service credit.
Tang says: In theory, this "airtime" is paid for by the employees ahead of time. Also in theory, if the payments really covered the costs then people would probably not pay into it and would save or invest the money elsewhere. A flawed "airtime" design allows the pension system to be gamed. We might be better off without it.
2. Prohibit Pension Holidays. All California public agencies would be prohibited from suspending employer and/or employee contributions necessary to fund the normal cost of pension benefits.
Tang says: This will ensure that pension systems are well funded, at a cost to government flexibility in times of economic crisis. Governments that would otherwise steal from their promises to their former workers will have to cut some service. This trades a bad outcome for a bad outcome, but on the whole it ensures a government's promise is kept.
3. Prohibit Employers from Making Employee Pension Contributions. All California public agencies would be prohibited from making employee contributions that fund the normal cost of employee retirement benefits in whole or in part.
Tang says: Consider the fact that this idea is being proposed. This suggests that some government somewhere was spending public funds to pay the fees that would normally come out of workers' paychecks, probably so that certain favoured employees could take home more money. I believe that would normally be called embezzlement.
4. Prohibit Retroactive Pension Increases. All California public agencies would be prohibited from granting any retroactive pension benefit increases, such as benefit formula improvements that credit prior service.
Tang says: This sounds like an obvious fix, but pensioners will be screwed if we have another high inflationary period like the late 1970s to early 1980s and the state cannot adjust their pensions for inflation without passing a new law.
5. Prohibit Pension Spiking: Three Year Final Compensation. Final compensation for new employees would be defined as the highest average annual compensation during a consecutive 36 month period.
6. Prohibit Pension Spiking: Define Compensation as Only Regular, Non-recurring Pay. Compensation means normal rate of pay or base pay.
Tang says: Both of these address the problem of employees increasing their pay in their final year and then getting pensions as if they had worked their whole career in that highest-paying job.
7. Felony Convictions. Prohibits payment of pension benefits to those who commits a felony related to their employment.
Tang says: I agree that embezzlers and the like should not be paid pensions, but it should be up to a judge to decide whether to take away someone's pension.
All in all, I think these reforms will save a small amount of money in the long run and should do more good than harm.