State and local governments continue struggling with unfunded pension liabilities that may top a combined $4 trillion, and additional bonding debt obligations almost as large. The way states have mismanaged these funds has led in part to bond ratings being lowered for Illinois, Connecticut, Kentucky, New Jersey, Hawaii and Pennsylvania, and has led to many smaller crises on local levels. Meanwhile, political fights in some states make solutions to this problem almost impossible to enact.
Amid this mess, Utah Sen. Orrin Hatch has proposed a bill that could offer a way out, and that would make it easier for private-sector workers to save for retirement, as well. Known as the SAFE Act (or "Secure Annuities for Employee"), it would allow states to transfer their retirement plans to private annuity firms, such as life insurance companies. The governments could offer fixed, predictable monthly benefits to employees. The private companies would assume all the risk and would be chosen by a yearly competitive bidding process. Funds would be portable, allowing employees to move them as they change jobs.
We don't know if this is the answer state and local governments are looking for as they struggle to make up shortfalls that began accumulating at the start of the Great Recession, but we give the senator kudos for coming up with a plan that has merit and seems workable.
Hatch can't be accused of hyperbole when he calls the nation's unfunded pension liabilities dangerously high, or when he says in a prepared statement, "America cannot continue sleepwalking into the financial disaster that awaits us if we do not get the public pension debt crisis under control." At the current rate, these governments have no choice but to eventually either drastically reduce public employee retirement benefits, drastically raise taxes or severely cut government programs, or a combination of all three.
Hatch's bill also would give more freedom to private companies looking to help employees save for retirement. It would remove the current cap that limits 401(k) contributions to 10 percent of income. Companies that don't sponsor such a plan and don't think they could afford it would be able to offer a simplified "starter 401(k)" with low administrative costs and an $8,000 per year savings limit, and several companies could band together to negotiate lower costs on retirement services for employees.
The bill would make it easier for 401(k) plans to offer annuities, and it would allow participants to withdraw money and place it in a Roth IRA or 401(k).
"Flexibility" seems to be the key word here. That is particularly important in light of opinion polls showing many Americans would like to save more for retirement but feel they are unable to. As Hatch noted, the nation's savings rate is hovering at about 2.5 percent. At the same time, Americans are beginning to live longer, and fewer workers — public or private — are covered by defined-benefit retirement plans than was true several years ago.
One of the factors contributing to the nation's slow recovery from the recession is the difficulty in covering liabilities left stranded by the collapse of equities markets and real estate. The nation can't continue to ignore or put off dealing with its public pensions crisis without suffering consequences. Utah's senior senator should be commended for proposing a way to make that a little easier.