California shows way through tricky pension mess.

Agenda-Setting Financial Insight.
June 8 2012 5:20 PM

California Shows Way Through Tricky Pension Mess

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San Jose and San Diego want current public workers to make sacrifices for their pensions.

Photo by OLIVER LANG/AFP/Getty Images

San Jose and San Diego want current public workers to make sacrifices for their pensions, like contributing up to 16 percent more of salaries to fund retirement schemes. The proposals, overwhelmingly backed by voters in elections this week, look to be a sensible way forward in the thorny thicket of pension reform.

Since the downturn, new hires have borne the brunt of belt-tightening in the nation’s public sector. They, not their elder cubicle mates, have had to swallow diminished expectations for their golden years. This unfair two-tier system is likely to further discourage the young and talented from considering a career in the civil service. In addition, such marginal reform won’t be enough over the long term to fill a $700 billion shortfall in America’s public pension system. A better approach is burden sharing - something San Jose and San Diego are trying to push through.

Their proposals, though different in form, both demand sacrifices from those already on each city’s payroll, and voters agree. San Jose won 70 percent for its measures, while San Diego got the backing of two-thirds of the electorate. The southern California city wants to freeze salaries for five years in a bid to slim future liabilities.

Silicon Valley’s Anchor City, meanwhile, is pushing for something more interesting. It hopes to encourage, but not force, workers to opt for what could be a cheaper, less generous, benefit scheme. If employees want to hold onto current benefits - like retiring by 55 - they’ll have set aside up to 16 percent of their salary for pension contributions. If everyone took that option, the city could save $25 million a year - potentially reducing the city’s own payout by around 10 percent. Alternatively, employees could keep their pension contributions as they are and instead help the city save money by accepting reduced perks like halving standard-of-living adjustments and not retiring until they turn 62. 

None of the options, however, is pleasant for workers. Unions have already filed suits to contest the proposal in San Jose. Yet such burden sharing looks inevitable. Historically, markets have done the heavy lifting for pension funds. Beefy 8 percent annual investment gains, however, look increasingly unrealistic. Many state and local government budgets, meanwhile, are already stretched to the breaking point. That leaves employees, who have traditionally contributed the least, to step up if they hope to have any pension at all. Better to try to find a solution now than wait until it’s too late.

Read more at Reuters Breakingviews.

Agnes T. Crane is a Reuters Breakingviews columnist, based in New York, where she covers capital markets and Latin America. She joined from Dow Jones Newswires, where she was an award-winning journalist who led a team of reporters covering the credit crisis.

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