If termites were eating your house, would you do what it takes to stop the damage, or would you sweep the termites’ trails off your foundation and pretend the problem doesn’t exist?
Unfortunately, the latter appears to be the strategy some lawmakers want to follow in dealing with Arizona’s woefully under-funded government employee pensions.
In 2003, all levels of government contributed $200 million to retirement systems for government workers. Last year, they contributed $1.1 billion. That’s an increase of $370 per Arizona household, adjusted for population growth. Paying for pensions is squeezing out spending on other budget areas, such as organ transplants for low-income people, public schools, and city services like libraries and parks.
The annual reports of the state’s four government employee retirement funds tell the tale. Contribution rates from taxpayers and employees will have to rise yearly for years to come, and even then the funds will get weaker before they get stronger.
It doesn’t have to be this way. A bill that makes only modest reforms to the state pension system barely passed a state House committee recently. Lawmakers must move ahead with this package of reforms, but they must not stop there. Arizona can stop digging its pension hole by acting more boldly, following lawmakers in Alaska and Michigan with a long-term strategy to provide retirement benefits without putting taxpayers at risk.
All new government employees should be placed in a 401(k) retirement plan with taxpayers only responsible for funding regular, annual contributions. If Arizona governments were making the average private-sector contributions to 401(k) retirement plans, the savings to all governments would amount to $800 million per year.
In the end, the ultimate goals of reforming the pension systems should be three-fold: create certainty in the budgeting process; give government employees control of their own financial futures; and prevent yet-to-be-born taxpayers from having to pay for other people’s retirements.
Dr. Byron Schlomach is director of the Goldwater Institute’s Center for Economic Prosperity.
Arizona State Retirement System: Comprehensive Annual Financial Reports
Public Safety Personnel Retirement System: Comprehensive Annual Financial Reports
Michigan Office of Retirement Services: Two Plans for State Employees
Alaska Department of Administration: Defined Contribution Retirement Plan