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October 2013 Policy Study, Number 13-6

   

Iowa Legislature and Governor Need to Focus on Pension Reform

   

Suggestions for Iowa Pension Reforms

   

 

If additional reforms are not considered and implemented by the Iowa Legislature, IPERS will remain at significant financial risk of under-funding in the future. The amounts owed to both current and future beneficiaries must be paid by future taxpayers — the younger workers of today and tomorrow. And many of these future taxpayers are already finding their financial future constrained because of a lack of jobs.

 

As the economy continues in a “jobless” recovery, the pension plans paying out income to retirees – especially to government workers – must have significant reforms, so that the burden on future workers and taxpayers will not be onerous.

 

One suggestion is that Iowa look at a Utah-type reform, where the state government provides new employees with hybrid options.

 

First, the state should provide the option of investing a specific amount in a 401k plan, along with a variety of low-cost mutual funds to choose from. This is in addition to the Social Security contributions made on the employee’s behalf. Current employees are able to choose a hybrid option, with a smaller guaranteed pension going forward and the ability to also have a 401k.

 

Additional changes being made by other states include ending the practice of double-dipping. Under “double-dipping,” an employee is allowed to retire and start drawing a pension, then is able to immediately (or fairly quickly) to be re-hired and receive both a paycheck and a pension.

 

Some states, such as Utah, are requiring that if you are rehired within a certain time period you must either put your pension draw on hold, or no further contributions can be made to your pension from the new job.

 

Other options include raising the retirement age and extending the “high-five” salary used to determine the pension further, to seven or eight years. Given that many pensioners “double-dip” by taking retirement, then going back to work full-time shortly thereafter, it would seem that an older initial retirement age would not be problematic for most workers. Lower retirement ages were set when life expectancies were also lower, and should be revised.

 

The gaming of the system by hourly and overtime eligible workers in padding their “high-five” salary is something which also must be further addressed. This is simply not fair to taxpayers. Going to a high seven or high eight would help to discourage workers from doing so.

 

At a most basic level, all states, Iowa included, must seriously look at the reality of a very unstable stock market going forward, with extreme highs and even more extreme lows in investment returns.

 

The Legislature and Governor must realize that one bad year has significant long-term impacts on the overall ability to pay promised pensions, as shown in recent history.

 

Overly optimistic expectations benefit no one – taxpayers or workers. Recent history documents these problems, as the Iowa funding level has fallen from healthy to potentially problematic. Initial contribution amounts should be based on a lower expected and required return, down from the current 7.5 percent to possibly as little as 5 percent.

 

Making this change in the expected return would mean that current pension contributions would have to be increased in order to pay promised benefits.

 

Yet, it is better to be conservative with our expectations and end up pleasantly surprised than to count on winning the lottery to pay next month’s mortgage. And when that does not happen, to have to turn to Iowa taxpayers again to pay your mortgage for you, in addition to the car payment they are already making.

 

   

 

Click here for pdf copy of this Policy Study

 

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