Imagine that you invest decades in public service working a state job and serving your community. You earned a fair, not exorbitant, salary. You chose public service, in part, to secure a decent retirement for your family and trusted that promises made will be kept. That monthly pension check is the cornerstone of your retirement plan. But then imagine a day when those pension checks just stop. You are left high and dry.
Sound impossible? That’s exactly what happened to hundreds of retirees in Prichard, Ala., in 2009.
How did such an outrage occur?
The answer is simple yet sad. Public officials in Prichard betrayed retirees. They broke promises and faith with public servants, refusing to maintain the pension fund at a level sufficient to actually pay the promised pensions to retirees.
Although state pensions in Oklahoma are not yet endangered, Prichard is a warning to employees, retirees and taxpayers. What happened to retirees in Alabama must never be allowed in this state.
According to official reports, Oklahoma’s seven defined benefit pension plans have a combined $11.4 billion unfunded liability. But Oklahoma’s unfunded liability may actually be $42.7 billion, the number reached when calculating the liability using risk-free rates to provide more certainty that benefit promises can be kept.
Massive unfunded liabilities threaten promises made to public employees and basic services for all citizens. Paying down pension liabilities means less money for essential services such as education, health care and police.
These pension troubles are not unique to Oklahoma. They exist across the country. Too often, leaders bury their heads in the sand.
Oklahoma can be different. We can show what real reform looks like by closing defined benefit plans to new members and instead offering a defined contribution alternative.
A study group recently outlined possible defined contribution alternatives to Oklahoma’s underfunded pension systems.
Starting with employees in the Oklahoma Public Employees Retirement System, new hires would be placed in a system in which the state contributes a percentage of each employee’s paycheck into a personal retirement account. The private sector has overwhelmingly abandoned defined benefit plans for this solution. State and local governments should follow suit.
Defined contribution is a win-win. Employees own their retirement money from the start and can take the benefit with them from job to job. The state gains fiscal stability because determining the amount needed to ensure retirement security is as simple as calculating a percentage of total payroll.
Any serious pension reform must also include a responsible approach to paying down existing unfunded liabilities. Oklahoma has already promised billions more in benefits than it is currently capable of paying. It must deliver on those promises and eliminate unfunded liabilities.
The devastating effects that a broken defined benefit pension system can have on employees, retirees and their communities is a wake up call. Oklahoma owes it to its hardworking public servants to pursue real pension reform before it is too late.
Williams, a former state legislator and gubernatorial candidate in Washington state, is president of State Budget Solutions.