What if one of the solutions to the mortgage meltdown was to eliminate the idea of mortgages? Makes sense, right? If mortgages don’t exist then there can’t be mortgage crises. Remember, we were in the depths of the worst market downturns on record. Unemployment was shooting up. Trillions were vanishing in a place called Wall Street. Government was forced to throw a life ring to the banks. Home mortgages played a big role in creating the financial mess America found itself in. Might have been a good time to get rid of those pesky mortgages?
If we fast forward to today we know the home mortgage survived. Gone is fast and loose lending. Banks went back to fundamentals, and America kept a tool that plays a big role in our economy. Lending institutions now require things like money down, good credit and loan amounts relative to income. Fundamentals we should have never strayed from.
Are pensions the equivalent of buggy whips and 8-track cassettes; have they become obsolete? No but we strayed from fundamentals and now we need to return. Plans that stuck to fundamentals are on solid footing today. They provide the example we need to return.
For success, start the plan with a reasonable plan design. Then throw in good data and a reasonable rate of return. Ensure your data are checked by an outside actuary to ensure accuracy. Next ,the plan needs steady contributions from both employees and employers. These contributions are made in good times and bad. Lastly, no longer can full medical coverage be offered in a pension. Costs are unknown and out of control. No longer can we let medical coverage threaten the sustainability of pension plans.
There are several reasons to restore traditional pensions. They are the most effective and efficient. Large pensions enjoy economies of scale. They pay much lower fees than individuals. Wall Street loves the individual retirement.
Group pension plans earn a higher return than individuals. It just makes sense that professional money managers would outperform cops, firefighters and teachers being asked to moonlight as investment counselors.
Most public employees do not participate in Social Security. This was done because firefighters and police do not make it to Social Security age to retire.
We use to preach the importance of the three-legged stool for retirement, Social Security, personal savings and pension. One leg has been destroyed and those that did it are going after the other. Experts that look at the data tell us the 401K generation is nowhere near prepared for retirement. We need to embrace the 3-legged stool once again. Pensions did not disappear because they were some kind of gimmick. We can look around the country today and find well-funded pensions. Washington State has the LEOFF 2 plan. Wisconsin, believe it or not, has a public plan that is almost fully funded. Anchorage closed a very sound police and fire plan. Corporations had sound plans but discovered how to get at the funds. Ellen Shultz of the Wall Street Journal details this very well in her book “Retirement Heist.” The point is a pension is not some idea of fiction.
Rather than put our collective head in the sand, the state of Alaska should take a close look at proposals to pay down the unfunded liability now — while we have extra cash, and we should look at SB 121. Sen. Dennis Egan’s SB 121 looks to improve public pensions without adding extra cost to the state. The goal of SB 121 is to create a reasonable plan that will be long term and sustainable. I urge all in the legislative process to bring their ideas and concerns to process and help shape a bill that brings back retirement security to workers in Alaska.
• Wescott, of Anchorage, is president Alaska Professional Fire Fighters, which represents Juneau firefighters.