For the Chippewa Valley Post
Part I of this series reported that because of successful investing by Wisconsin’s Employee Trust Fund, nearly $4 of every $5 paid to public employment retirees comes from investment returns and only $1 in every $5 comes from employer and employee contributions.
Generally, the defined benefit plan for public employees provides for a better funded retirement than most private defined contributions plans, but there are notable exceptions. This is especially true for highly paid and highly disciplined private employees who make significant contributions to their own retirement plans and stick with them for the long term. Nonetheless, the great majority of people covered by defined contribution pension plans do not wind up with a secure retirement.
Given the broad success of public employees’ defined benefit plans, the question arises as to whether private employers and their employees should have access – on a voluntary basis – to the state retirement system and, if so, what it would take to make this feasible?
What Would Be Required?
To make this work, private employers would have to commit themselves and their employees to the combined pension deductions currently equal to 13.6% of wages. For example, if an employer is currently funding a defined contribution plan at 6% of wages, the employee would have to provide 7.6% and both would have to commit to these numbers over time. If the employer agreed to a higher contribution, the employee’s contribution could be lowered accordingly.
While this may be more than many private employers currently put into their employees’ 401k, it is much closer to what is needed for a secure retirement. One could start by allowing employers to opt in voluntarily to the Wisconsin Retirement System (WRS), while meeting the same requirements as public employers.
This would mean required annual contributions from private employers and their employees that remain invested for the duration of employment. And opening the WRS to private enrollment would almost certainly require legislative approval.
While the requirement of fixed minimum annual employer and employee contributions as a condition of employment may seem paternalistic, annual contributions over a working lifetime and a coherent investment strategy are the core principles of a financially secure retirement. A key weaknesses of many current defined benefit pension plans is that they are voluntary and most employees fail to make sufficient matching contributions or, if made, employees all too often engage in unwise investment strategies.
How This Might Play Out
It seems likely that larger employers already making significant defined contributions might be first adopters. Other private employers and employees would likely be attracted to join over time as the benefits of doing so became more broadly appreciated. The advantages to employers are substantial: they would not have to maintain 401k plans and they could point to a very attractive retirement package in attracting and retaining employees.
When one considers that pension contributions are prior to state and federal taxes, the actual reductions in take home pay to employees for their share is considerably less than the face value contribution. Most importantly, committing to this level of pension investment provides the basis for a financially secure retirement, which is something of great interest to all employees and to ethical employers.
Currently WRS members are vested in five years and can take their payments with interest if they leave the system before vesting. This would also apply to private enrollees. If they stay in for five or more years they would have the option of staying in the system and receiving a retirement benefit or rolling the cash value of their account to another plan should they move to an employer who is not participating in the WRS. Much is to be gained, little to be lost by participating for most private employees.
Benefits for All Parties
The benefits of allowing WRS enrollment are substantial for both private and public employees in Wisconsin and for the state’s economy. Private employees would benefit from a well-funded and professionally invested retirement plan underpinning their financial security at retirement – something that many of them now lack.
Public employees’ benefits become more secure when the tax-paying public sees them as fair – and when private and public employees share a common benefit. Making these benefits available to private sector employees would accomplish that.
Finally, consumer spending drives the economy. Ensuring a larger share of Wisconsin retirees – both private and public – a financially secure retirement will have significant positive impact on the state’s long-term economic wellbeing.
Factors in the WRS’ Success
It should also be noted that a key to the success of the WRS is that it is fully funded on an ongoing basis and independently managed. Oversight of various parts of its operations is provided by six different boards whose members are appointed by the legislature or the governor, elected by WRS participants or chosen as representatives of a group involved with the WRS.
Investment of retirement funds is overseen by the State of Wisconsin Investment Board (SWIB). These funds are not comingled with state funds and a Wisconsin Supreme Court ruling protects them from confiscation or borrowing by the state. Contributions for a given employee are made in the same year that work is credited so that the pension investments grow over the employee’s working career.
Unlike retirement systems in some states that rely on payments from current workers to pay the pensions of retirees, the WRS is fully funded and could continue to pay the benefits of retired workers even if the system were closed to new members tomorrow.
There was an attempt in the most recent legislative session to change the way one oversight board is appointed, to make its membership consist solely of legislators. Widespread and bipartisan opposition wisely stopped that measure, which would have restructured the committee responsible for reviewing any proposed changes to the WRS before the Legislature can consider them.
The third and final part of this series will explore the various options for health insurance currently available to public employees and whether allowing private employees to become part of that system is a viable alternative.
About the Author: Jack Pladziewicz was a member of the chemistry faculty at UW-Eau Claire from 1973-2002 and is Professor Emeritus. Between 2003-2014 he worked in various capacities for Research Corporation for Science Advancement (rescorp.org), a private foundation dedicated to funding basic scientific research in the United States since 1912. He retired as president of the foundation in 2014.
For a list of sources consulted for these articles, Click Here