After reviewing the plan, the research organization gave the idea its top grade, saying it eliminates a troublesome financial risk for state and local governments, protects workers who change jobs frequently, and rewards young workers--all while providing a steady stream of income for retirees.
“Unlike any other plan I have seen, it really addresses the retirement security issue, the funding problem, and it provides incentives to allow employers to attract and retain a productive workforce,” said Richard Johnson, director of the Urban Institute’s Retirement Policy Center. “It is hard to balance those three objectives.”
The Hatch bill is similar to a financial maneuver taken by several big corporations, from General Motors and Ford to Heinz and Verizon, which have moved to shed pension liabilities in recent years. For local governments and states, the unfunded liabilities are huge, ranging anywhere from $1.4 trillion to more than $4 trillion, depending on the assumptions plugged in by actuaries.
As it stands, a study of 150 plans by the Center for Retirement Research at Boston College found that the plans have just 72 percent of the assets on hand needed to cover future liabilities, a figure that drops to just under 65 percent if new accounting standards are used.
Hatch's idea has been heartily endorsed by insurance companies hungry for new business. But it has been panned by municipal employee unions and their allies, who worry that payments will not be as generous as current pension schemes, particularly for long-tenured workers. Johnson noted, however, that many pension plans tend to shortchange workers who stay on the job fewer than 20 years, and he said Hatch’s plan would address that, although workers who stayed on the job longer would get smaller payments than their predecessors.
Still, some critics have called it “a solution in search of a problem,” a characterization that has left Hatch incredulous.
“My bill is not a solution in search of a problem, and it is certainly not meant to be an attack on anyone or anything,” Hatch said during a Capitol Hill event Wednesday. “It is meant to offer and alternative path to employers who want to continue delivering lifetime retirement income for their workers in a world where that is becoming increasingly difficult.”
The underfunding of public pension funds is a significant problem, even with a stock market that has been surging since the crash that accompanied the Great Recession. Have a look at the chart below:
To be sure, Hatch’s proposal is no panacea. For one, it would be voluntary for state and local governments to take part. We can only imagine the political debate that would ensue when local pension managers offer to relinquish control billions of dollars to insurance companies.
Beyond the annuities offered by insurance companies, Hatch’s plan would create 401(k)s that would allow workers to save $8,000 annually.
"More and more state and local governments face problems as mounting pension costs consume ever larger portions of their budgets," Hatch said. "There is also stress placed on taxpayers who have to be pay for it all."