Idaho's government pension system is underfunded by about $2.5 billion, according to IdahoReporter.com, and taxpayers will likely soon have to pay more in order to properly fund this already expensive entitlement. Lawmakers could implement a better, less costly alternative for retirement benefits, and now would be a good time to do it.
Taxpayers subsidize the pensions of retired employees by paying into the state Public Employee Retirement System of Idaho (PERSI) an amount equal to more than 10 percent of payroll. Employees also contribute to PERSI. But benefits are outpacing the amounts being paid by taxpayers and employees, meaning both can expect to have to increase their contributions for public employee retirement starting next July, to almost 11.5 percent for taxpayers. For the state general fund alone, the cost will top $15 million.
Most companies in the private sector don't work like this. Pensions are too pricy. Instead, businesses that offer a retirement benefit contribute a fraction of an employee's salary to a retirement plan or require the employee to put in some amount before the company contributes up to a small percentage. The HR firm Towers Watson & Co. says the most common contribution is 3 percent if the employee saves 6 percent. And, unlike pension systems, when the economy is bad, employers can pull back the benefit. And they have. Towers Watson found that, since the fall of 2008, 18 percent of companies with more than 1,000 employees had cut or suspended retirement plan contributions in an effort to save money.
So one wonders, what makes state and local government and their employees so exceptional that taxpayers are required to feed money into a retirement program that is misaligned with anything happening in the private sector -- even during good times?
The answer is, PERSI has one of the better run, positively respectable pension programs in the country. That doesn't change the fact that it is far more expensive than other options and pension plans are becoming a relic. Taxpayers would unequivocally save money if Idaho switched to a defined contribution program for government employees.
Consider this: Idaho state and local governments added 4,600 new public employees from July 1, 2009 to June 30, 2010. The combined annual payroll for these new employees is $104.7 million, according to PERSI. If those new employees had been put into a defined contribution plan, instead of our current pension plan, at a generous 5 percent a year, it would have cost taxpayers around $5 million annually. Instead, under our current system, the retirement benefit cost taxpayers $11 million. Had we started moving new employees onto a defined contribution program three years ago, the cost to taxpayers would have been about $20 million instead of the $42 million we did spend.
The exact savings that would be obtained next year by gradually pulling the plug on the state's pension benefit will depend on how the plan is implemented; lawmakers will need to simultaneously extricate the state from the 45-year-old pension system while keeping it fully funded for existing participants in the program. But in the long run, there's little doubt: Taxpayers could save millions of dollars if the Legislature would end this dinosaur of a government employee benefit.