December 23, 2012

WALTER RUSSELL MEAD: Next Step In Kansas’ Red Revolution: End State Pensions?

Since the right wing of Kansas’ Republican party gained control over the state government last month (defeating both Democrats and moderate Republicans to establish perhaps the most pro-Tea Party state government anywhere in the United States), we’ve been keeping an eye on developments there that could tell us what Tea Party governance would look like.

A new proposal on state pensions from the Kansas Chamber of Commerce offers a clue: the proposal would substitute defined contribution plans for the current defined benefit plan that goes to state retirees. For those of you not fully up on pension minutiae, this matters. In a defined benefit program, your employer promises a fixed stream of payments (usually with cost of living adjustments to take care of inflation) to employees when they retire. The amount of your payment is based on a formula that looks at things like your length of service and your pre-retirement pay.

This used to be the standard pension system in the private economy as well as for government workers. It is a very “blue model” system: it assumes a world of lifetime employment and stable employers. Often, defined benefit pensions emerged from negotiations between unions and employers.

In the private economy, the defined benefit system is in rapid retreat. Employers don’t like these pensions because they are both risky and expensive to manage. If the investments set aside to pay future pension obligations don’t perform well enough, companies have to divert current earnings to them or, worse, borrow money to make up the gap. Another problem with these pensions is that they create problems for companies facing fast technological change. Automakers, for example, need many fewer workers today than they did thirty years ago to produce cars; as a result the proportion of pensioners to active workers has shot up, and companies are stuck with legacy labor costs which make it more difficult for them to compete or attract new capital.

It’s not that radical. I have a defined-contribution plan, and it’s been the rule in Tennessee for decades.