WSJ: Pension Reform 'Transition Cost' Claim More Bogus than Ever

An article by American Enterprise Institute scholar Andrew Biggs in the Wall Street Journal (subscription required) explains how the bogus “transition costs” argument against reforming government pension systems recently became even more bogus.

To refresh, this was the argument used in 2012 by teachers unions and state pension bureaucrats to scuttle a transformational school pension reform bill that had passed the Michigan Senate. The measure would have closed the system to new hires, instead granting them generous 401(k) benefits.

Biggs writes:

But the public-pension industry—government unions and the various financial and actuarial consultants employed by pension-plan managers—claims that ‘transition costs’ make switching employees to defined-contribution pensions prohibitively expensive...

The argument goes as follows: The Governmental Accounting Standards Board’s rules require that a pension plan closed to new hires pay off its unfunded liabilities more aggressively, causing a short-term increase in costs.

But GASB standards don’t have the force of law; nearly 60% of plan sponsors failed to pay GASB’s supposedly required pension contributions last year…GASB standards are for disclosure purposes and not intended to guide funding. New standards issued in 2014, GASB says, “mark a definitive separation of accounting and financial reporting from funding.”

In fact, nothing requires a closed pension plan to pay off its unfunded liabilities rapidly, and there’s no reason it should…Whether new hires are in a defined-contribution pension or the old defined-benefit plan, the size of the unfunded liability and the payer of that liability are the same.

Michigan’s school pension system is among those “60 percent of plan sponsors” who failed to meet “annual required contributions” last year, and thus it broke a GASB “rule.” This means the state did not contribute the amount the system’s own accountants estimated is needed to both cover the cost of another year’s pension credit earned by school employees, and start “catching up” on the past underfunding that has generated a $26 billion unfunded liability. (The estimate was $2.1 billion, and the state only put in $1.6 billion.)

Rule number one of getting out of a hole is to stop digging it deeper. The bill passed by the Michigan Senate in 2012 was potentially transformational because it would have closed the defined-benefit school pension system to new hires, placing the state on a glide path to eventually getting out from under employee legacy costs.

The signs are hopeful that the current House and Senate may complete the work begun by Gov. John Engler and the 1996 Legislature when they closed the state employee pension system to new hires, a reform that saved taxpayers between $2.3 and $4.3 billion.

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