It’s been an item of faith among would-be pension reformers that switching public employees from defined benefit pension plans to defined contribution plans like 401(k)s would save taxpayers money. When I’ve suggested here that the savings may never materialize, the faithful have scoffed.
So here’s one, early data point: In its new budget, San Diego is projecting a $40 million increase in pension costs for the coming year, much of it due to the switch from defined benefit plans approved by voters in June 2012 in the Prop. B reform plan.
This is not a surprise. It was predicted by San Diego’s Independent Budget Analyst.
A switch to defined contribution pensions doesn’t, by itself, save money. Because of higher fees charged by financial institutions and the lower returns realized by individual workers in self-directed retirement accounts, it takes higher levels of contributions to achieve a given level of retirement savings in 401(k) plans. For the switch to save taxpayer dollars, government employers must either reduce their workers’ retirement saving or cut their wages. In San Diego, Prop B will yield lower costs for taxpayers only by holding total city worker pay—wages plus benefits plus contributions for retirement plans—below the levels anticipated before passage of the measure. In particular, this will require learning to say no to police and firefighters.
Good luck with that.