Protests in Wisconsin | Retirement benefits in the crosshairs

Wisconsin Workers vs. Governor Walker

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Wisconsin Workers vs. Governor WalkerThe Union Protests in Wisconsin have had me perplexed for a while, but I am starting to put it all in perspective.

Governor Walker maintains the position that he just wants State workers to contribute to their pensions like private sector employees. Union members claim he is trying to take away their ability to bargain collectively.

Unless Governor Walker intends to completely revamp that Wisconsin State Pension system his claim makes no sense. The government is going to pay 100% of pension costs either way because it is a defined benefit pension, opposed to the defined contribution plan that is popularly known as a 401k.

Here is how a defined benefit plan works. The employee works so many years and then they are guaranteed a percentage of their last years of salary in retirement. For example, if they made $60,000 the last year of employment, and their defined benefit was 90% of that annually, they are guaranteed $54,000 annually for the rest of their life. The guarantee applies regardless of how well the stock market is doing.

So let’s say Governor Walker gets his way and the state workers have to pay a percentage of their salary into the system.  Does that mean that it will be put into a 401k or similar tax deferred account that needs to be managed by the employee?  If it doesn’t, it is a farce, and let me demonstrate why.

Under today’s plan:

  • Worker earns $100
  • Defined benefit income is 90% of last year’s employ – guaranteed

Under Walker’s proposed plan:

  • Worker earns $100
  • Worker gets $6 deducted for retirement
  • Defined benefit income is 90% of last year’s employ – guaranteed

What changed? The worker received a 6% pay cut. The government still paid the $100 to the state employee.

What the Governor has done, is keep more money in government coffers, money that should be invested in retirement plans, but will most likely be borrowed against to make the budget look less insolvent.

The reason for the protests is the Governors plan to weaken the unions by allowing workers to quit the union and to hold secret ballots. He is attempting to destroy the collective bargaining power of the state workers, allowing the state more flexibility in structuring salary and benefits of state employees.  Arguably this would make government work less stable and more like the private sector. It would also make government programs and services less stable, which might be a quality of life issue.

Imagine how hard it would be to get through the DMV in a recession because they cut 50% of the work force to save money.

This defined benefit retirement plan is a real issue. It is pensions that are putting California in its current financial crisis, pension obligations almost destroyed the big three American auto makers, by creating obligations that made it impossible for them to compete against other companies that were less saddled with such financial obligations.

Social Security is also a big defined benefit safety net that struggles under the impending crisis due to the obligations of the baby boomer generation that will live longer than any other and there are not sufficient funds to meet that obligation for the number of years required.

Defined benefit pensions were a result of the financial devastation coming out of the great depression, but they are creating their own financial crisis because the retirement age has not adjusted with life expectancy. A defined benefit plan worked when it only needed to pay for 5 years of retirement, but with people often living 30 years or more in retirement, the system cannot meet the obligation.

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