The Utah Pension Model

January 21, 2011

As Illinois and New Jersey struggle to reform their broken public pension plans, it would be nice to hear a success story for a change.  Witness Utah, which last March replaced defined benefit pensions with a 401(k)-style plan for new state and municipal workers, says the Wall Street Journal.

  • As the stock market plunged in 2008, the state pension fund lost 22 percent.
  • From nearly 100 percent funded in 2007, it fell to 70 percent funded in 2009.
  • Utah suddenly faced a long-term $6.5 billion funding gap.

Utah's constitution bars pension changes for current workers -- short of an imminent financial crisis in the fund -- so the legislature created a defined contribution plan for all new hires starting this year, says the Journal.

  • The state contributes 10 percent of each worker's salary (12 percent for public safety workers and firefighters), a generous amount by private company standards.
  • If they wish, new workers can choose a defined benefit plan, but the state contribution to such a plan is legally capped at 10 percent.

The reform has benefits for taxpayers and public employees.  Workers own their retirement account and can carry it to another job and politicians can no longer raid the pension fund to pay for other government spending.  As for taxpayers, the reform will eventually slash state pension liabilities in half and they no longer bear the risk of having to pay higher taxes if the stock market declines.

From now on in Utah, tax increases or spending cuts for schools, parks or roads will not be necessary to make legally required payments to retired state workers.  The contrast could not be sharper with California, New York, New Jersey, Illinois and other states in which pension contributions are squeezing out other priorities, says the Journal.

Source: "The Utah Pension Model," Wall Street Journal, January 19, 2011.

For text:

http://online.wsj.com/article/SB10001424052748703583404576080260001386474.html?mod=googlenews_wsj 

 

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