One of the most telling statements in favor of pension reform appeared in Rick Orlov’s article in the Los Angeles Daily News on October 15. It concerned an actuarial review authorized by Chief Administrative Officer Miguel Santana to study a possible shift in the city’s pension plans to a 401(k) style system. The conclusion was it would cost the city even more than the current system – that was the claim.
According to the study, the city would still be liable for the benefits due workers covered by the existing system without assistance from contributions of new city workers, who would be covered under a 401k plan backed by former Mayor Richard Riordan in a ballot measure.
The math is correct – funding would be short – but the conclusion is deceptive.
The actuaries’ conclusion is an admission of just how underfunded the current plan is. A plan that depends on contributions from future generations of workers to fund the benefits of current employees is doomed to eventually run out of assets. It is the same problem Social Security faces, but with one big difference – the federal government can create money; the city cannot.
Not to digress, but even the feds will have to raise contributions and reduce and freeze benefits for the Social Security System in order to assure solvency.
Even if Los Angeles did not migrate to a 401k plan, the reduced workforce means less money flowing into the retirement plans, further straining funding levels.
Assuming the optimistic earnings assumption of 7.75% panned out, the taxpayers would have to contribute more and more to pay for future benefits – that’s assuming they would be willing to do so. The prospects of the City Council convincing them to pay more would be slim, especially with only diminishing services to show for the money.
The actuaries are making a specious argument in favor of the existing plan. It is as if you were to run on a treadmill set for an ever-increasing speed. In the long-run, you will be unable to keep pace and land flat on the floor.
The study is just the type city officials love. It misleads the public into believing that the status quo is sound, but what it really proves is the certainty of a slow death (maybe not so slow). The city will be dead and buried after the current crop at City Hall are collecting their benefits – for some, like Dennis Zine, double benefits.
The city’s unions will pour millions into fighting Riordan’s proposed charter amendment.
Now that Rick Caruso is not going to run for mayor, maybe he can help the former mayor’s cause with a few dollars. He would be performing an important public service.