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My original intent today was to address an issue that has been bothering me for many years, but becomes even more annoying during the silly season we call election time. Simply put, it is the tendency to blame “special interests” for all that is wrong in the world. I was set to defend these so-called destroyers of all that is good and point out the many positive changes they have brought, but then something happened: The City of San Diego decided to gut their employee retirement program.
I hope that voiceofsandiego.org will give me another opportunity before the November election to address the benefits that special interests provide, but as the chair of a very well-run $300 million pension fund, I feel obligated to at least propose ideas as to how a successful retirement plan should be structured. I also look forward to hearing about and maybe even copying some of your ideas.
I will address defined contribution plans in my next post, but for now I want to focus on defined benefit (DB) plans. Every DB plan has certain risks that are unavoidable and simply due to the nature of the plan. Actuarial assumptions that later prove to be incorrect in any of these areas can be very costly to a pension plan:
1. Investment returns
2. Life expectancy
3. How long each employee will work
4. How many employees will take a disability retirement
5. Percentage of employees that will work long enough to vest in the plan
Despite what you may have read, neither the City’s plan nor any other that I know of have had any significant problems with any of those risk factors.
Unfortunately, many DB plans are structured such that they put unnecessary risks and restraints upon themselves. Most, if not all, municipal plans base the benefit on employee salary and most, if not all, negotiate the benefit amount and then allow the trustees and actuaries to set the contribution level. This is absolutely the reverse of what a well-structured plan should look like.
A pension plan is considered DB because the retiree is guaranteed an income for life, but this doesn’t exclude the plan from one basic fact: The source of that income can only come from contributions and investment earnings. No employer, except the federal government, has a license to print money.
In a well-designed plan, the contribution, not the final benefit, is negotiated. The benefit is then set by the trustees and actuary based on this contribution. In my next post I will explain how this works in our pension plan, but I can tell you this: An inside wireman who starts work today and works for thirty years would retire with a pension of just over $7,000 per month. This assumes no increase in the pension contribution rate and 2,000 hours worked per year. In case you were wondering, our pension plan is significantly more than 90 percent funded.