Issue Paper: Pension Benefits
PRESERVE TRADITIONAL PENSION BENEFITS FOR WORKERS
The Rhode Island AFL-CIO is committed to maintaining the traditional pension benefits (known as defined benefit plans) for public and private sector workers. Traditional benefit plans offer a secure stable income for retirees. Defined benefit plans provide pensions that are not dependent on the ups and downs of the stock market. Money invested in traditional pension plans is professionally managed offering a stable income for retirees.
An increasing number of private sector employers are eliminating traditional pension plans and are moving workers into defined contribution plans (such as a 401(k)). While defined contribution plans provide for some individual control, there are significant negative aspects to these plans. The plans put the risk of investments on the shoulders of workers. The plans often charge high administrative fees which are paid out of the worker account. The private accounts do not guarantee lifetime pensions since one could outlive their savings. Market performance could significantly erode pension savings.
President Bush was unsuccessful in his proposal to change social security from a tradition pension benefit to private accounts. In Rhode Island, some have proposed similar changes for state workers and teachers. State workers and teachers pay some of the highest contributions in the country (8 ¾% and 9 ½% of his/her salary respectively). The State needs to supply more into the pension fund to pay the high unfunded liability caused by past insufficient State contributions and other factors. It will be very expensive for the state to pay off the unfunded liability because no new employee money will be going into the fund to invest and earn dividends. Recent estimates indicate that it would cost the State an estimated 150 million dollars in just the first (1st) year to convert to a defined contribution plan. A conversion would not save any money in the budget and would actually make the State budget crisis worse.
Forcing either current state workers and teachers or new hires into a risky defined contribution plan is unfair and bad public policy. The State is still obligated to pay off the unfunded pension liability, making it very costly to eliminate traditional pension plans. The current unfunded liability will be completely paid off in 17 years which will reduce the State’s contribution to about 2% of payroll. Creating a substandard defined contribution pension plan would make it more difficult to hire well qualified employees to provide important public services.
AFL-CIO POSITION
The Rhode Island AFL-CIO is opposed to any measure that would force current workers or new hires into defined contribution private accounts.
