Kate Marshall & Elliott Parker: Retirement security is an issue for all Nevadans

As the Nevada Legislature considers reforming the state’s pension system, some want to essentially dismantle it. That would be wrong.

First, some facts. The Public Employee Retirement System (PERS) is the pension system for over 150 public employers in the state, ranging from the Clark County School District and UMC to Henderson’s public library district. Our state government and its employees account for less than 10 percent of the system’s future liabilities. Unlike some other public employers, the state requires its employees to pay half of the calculated cost of their retirement.

According to PERS, the average state employee in Nevada retired at age 64 and earned a monthly benefit of $2,603 in 2012. Since the AARP reports that, nationally, the average retiree’s monthly income was $2,645 in 2012, it is hard to argue this is excessive.

In the private sector, the average employee contributes 8.2 percent of income to a retirement plan, while the average employer contributes approximately 8.9 percent if we include Social Security.

State employees currently pay 13.25 percent of their income into retirement, which the state matches instead of participating in Social Security (which would require a match of 6.2 percent). The Governor proposes to increase this contribution to 14.5 percent each, which would raise the state’s cost by a little under $10 million, or less than 1.2 percent of his proposed $7.3 billion budget.

We often read of some CEO who diverted money from employee pensions and mismanaged his company, but still left with millions of dollars in his pocket. It would be unfair to say this abuse is typical. In the public sector, we hear of a small share of public retirees who get far more than their fair share of these pension funds. This too is not typical.

As with any program, good management requires diligent oversight to identify such abuses and eradicate them. For example, we should make sure that only a retiree’s base pay is included when we calculate their benefits.

We can close these loopholes without having to tear the whole system apart.

It is tempting, but incorrect, to equate other compensation problems with PERS. Some city and county governments have also promised more benefits, such as subsidized health care for retirees, which they can no longer afford on their current revenues, and in Nevada these local governments also typically pay much higher wages than the State.

However, there is one big difference between public and private pensions, especially in Nevada. Around 75 percent of our public sector employees are part of a retirement plan, but two-thirds of our state’s private sector employees don’t participate in one.

Our real problem is that a large majority of Nevadans, and of Americans in general, are not saving enough for retirement.

Back when Social Security was enacted, most men who reached 30 could expect to live until 68. Women could expect to live a couple years longer, but those in poorer income groups usually lived about a decade less. Pensions for those over 65 were thus not expensive, since most people would not need them for long, and for the poor they were often a bad bet.

Social Security made old age less precarious, and in the 1960s Medicare helped make it less unhealthy. The longevity gap for women grew, yet the gap between the richest and the poorest fell by half. While public sector pensions became common in the 1920s, private sector pensions to supplement Social Security became common in the 1940s. The poverty rate for the old plummeted, but as people lived longer the need for retirement savings grew and the cost of pensions rose.

From the 1950s to the 1970s, Americans saved around 10 percent of their personal incomes. This rate began to fall after 1982, and hit bottom at 2 percent in 2005. This drop was partly driven by the rising cost of health care, and by stagnating incomes for the middle class which made it harder to save. Homeownership rates are now roughly where they were in 1980, so it was not driven by people saving in other ways.

Over the last two decades, as people have been living longer and saving less, the private sector has begun to dismantle its pension system, especially for those employees with lower incomes. Plans have shifted towards employee choice, but tax-deferred savings primarily benefit those in higher tax brackets.

Retirement plans have also shifted from defined benefits, which put the risk on the employer but also tempt them to underfund the system, to defined contribution plans, like that used by the Nevada System of Higher Education. These shift the risk to the employee, and in general earn lower rates of return and pay higher fees. They are, however, more portable, and they more clearly connect the benefit to the contribution.

The real question is, how do we ensure that all our workers, both those in the small public sector and the much larger private sector, are saving for more than an impoverished retirement?

There are lessons to be learned from other states. While Illinois has one of the most troubled public pension systems in the nation, the result of years of underfunding and overpromising, it has recently become the first state to create an automatic retirement savings program for the private sector.

The Illinois secure choice savings program will require all private employers with at least 25 employees and no qualified retirement plan to offer access to an Auto-IRA or pay a fine. A 3% payroll deduction goes automatically to retirement savings invested in a target-date fund, and employers don’t have to match their employee’s contributions. Employees can opt out, but research has shown that most won’t and their retirement savings will rise.

We should study these lessons and seek to adopt best practices. We should be wary of those who argue that public employees and their employers should save less, and become more like those in the private sector. We should focus instead on how to help more of the middle class obtain retirement security.

Kate Marshall is the former state treasurer. Elliott Parker is a professor of economics at the University of Nevada, Reno.