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A common sense solution for government pensions

Yeson487I just started my first job out of college. Along with developing a newfound coffee addiction (cold brewed with a splash of almond milk, please), I set up a 401(k) and IRA to help plan for retirement.

For most recent grads like myself, this is a routine part of the transition into the workforce.

If someone were to tell me that I could “cash in” my unused vacation and sick days prior to retirement, or that my retirement fund was not based on investment performance, I would have never believed them.

Since when does an unused vacation day become part of one’s retirement portfolio?

Annica Benning

Annica Benning

Interestingly, for many government employees, that is the norm.

Pension spiking — when government employees cash in their unused vacation or sick days and other fringe benefits to artificially inflate their pension prior to retirement — has cost the city of Phoenix millions in taxpayer funds.

Moreover, the accounts are set up so that retirees are guaranteed set payments even if the pension fund doesn’t have enough money to make those payments.

The city of Phoenix Employees’ Retirement System, which covers all municipal workers except police officers and firefighters—they are covered by a completely separate, state-mandated retirement system—cost taxpayers $129 million this year alone, up from $27.8 million in fiscal 2002. And costs continue to rise.

Phoenix’s current pension system is unsustainable and needs to be reformed.

This November, voters will have the opportunity to end the process of pension spiking, as well as reign in unsustainable city pension obligations, by voting YES on Proposition 487.

For new city employees, the current pension system will be replaced with a common sense, investment-driven retirement account like a 401(k). Under the new plan, the city will contribute a set amount to the account and the retiree’s benefits depend on his or her own contributions and investment performance. Employees would have a say in how their money was invested. They would be able to select the funds that they think would work best for their retirement planning, just like I was able to when I set up my 401(k). In addition, retirees would be able to pass on their retirement savings to their children and grandchildren, a benefit currently not allowed. And if a worker leaves the city before she retires, she can take her retirement funds with her, another benefit currently not allowed.

In addition to creating more flexibility for retirement funds, Prop 487 puts a stop to pension spiking by prohibiting the use of benefits such as sick days to artificially inflate pension pay.

An independent analysis conducted by the Reason Foundation determined the Phoenix Pension Re-form Act will result in at least $394.7 million in taxpayer savings within its first 20 years of implemen-tation. The study also found the initiative will produce $31.6 million in savings in the first year alone.

Proposition 487 ends pension spiking and gives city workers a sustainable, performance-driven in-vestment fund. That’s a win for taxpayers and a win for retirees.

– Annica Benning is litigation investigator for the Goldwater Institute.

2 comments

  1. The city of Phoenix employees had an overly generous pension in which they were required to contribute little (if any) of their salary. When things were doing great the city could get away with giving out such a generous pension. It was a bad plan that should be changed.

    As we go forward, Prop 487 should not be used as a blueprint to “fix” the Arizona State Retirement System, of which I am a member (retired). There are major differences between the city of Phoenix’ plan and the ASRS plan.

    * ASRS members have always contributed 50% of the cost of the plan and currently paying out about 12% of their salary to pay for it (and the state matches that amount).
    * ASRS retirees pay for 80% of their health care plan, which is the best funded health care plan of all states.
    * Unlike city of Phoenix employees, state employees for years were making 20% below the average salary in the market. They currently are about 10% below market.
    * The average pension for ASRS retirees is about $16,000, with a median being around $13,000.
    * The cost to the state and members is peaking and will be going down from here to eventually end up around 6%.
    * There have been many adjustments made to the ASRS plan in recent years to keep its costs down, such as raising the retirement age and changing the formula for calculating the pension to prevent spiking.
    * And Finally, most workers are not financially sophisticated enough to know how to invest for their future retirement. While I recommended to the pension reform committee that their be mandatory classes to help state employees plan for their retirement, it still is a difficult process to know when and where to invest. That’s why there are professionals to handle pensions, to know when to reduce risk and avoid the ups and downs of the stock market.

    Just because the city of Phoenix created a bad pension system is no reason to throw out ASRS’ system, which is close to being fully funded and is in better position than most pensions to meet its obligations.

    Brent Fine
    Former State Employee
    * The fund has not given out a cost-of-living increase

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