Three Lessons From 2020 on Redesigning Public Pensions
As we all know, 2020 has been a very difficult year emotionally and economically across the public and private sectors. At the same time, it has presented opportunities to make lasting positive change in terms of how organizations adapt to change and prepare for risks. While pensions have largely been spared from the financial crisis this year due to a spellbound, record-breaking stock market, the looming threat of unfunded liabilities remains urgent and now is as good a time as ever to address it.
At Cityfi we focus on municipalities so that is what I’ll discuss here, though these lessons can certainly apply more broadly:
Lesson 1: Be inclusive and representative.
In bringing structural racism to the forefront of our collective consciousness, 2020 is teaching us about the importance of representing the people you serve in leadership positions. An example that comes to mind is John Oliver’s episode on facial recognition and how people are realizing that when the creators of this technology and the people in the training data sets, etc., are mostly white, we should not be surprised that the system it creates is biased against people of color.
When it comes to pensions, future workers and taxpayers are typically not represented at the bargaining table though they are very much impacted by the resulting negotiations. To the extent cities can address this directly (e.g., by having a mix of new and older workers on the pension board), they should, and they should otherwise seek to gather input from missing stakeholders.
Lesson 2: Embrace (or at least accept) uncertainty.
The conversation about pension reform must move beyond defined benefit (DB) versus defined contribution (DC). Covid-19 has reminded us that forces outside of our control may interfere with our plans, and that we certainly do not know what the future holds in terms of economic growth (which is what defined benefits are based off of).
In his book The Future of Pension Management: Integrating Design, Governance, and Investing, Keith P Ambachtsheer recommends moving to language such as “defined ambition” (DA) or “target benefit” (TB). The key to this shift is in communication. In addition to clearly articulated targets and an explanation of variables that add uncertainty, pension fund administrators should send members regular progress reports on where each employee stands toward accumulating their post-work pension target so that they can adjust their spending or where they are invested. However, for this to really work, employees will also need help or alternatives in order to retire with confidence if things go off track. Joe Biden’s Plan for Older Americans is a good start.
Lesson 3: Celebrate Small Wins.
In 2020, we’ll take whatever silver linings we can get, like reduced traffic or learning to become better cooks. In time, we also hope that some of these small wins snowball into something greater. Perhaps today’s stimulus checks pave the way for universal healthcare or basic income.
Regarding pensions, California recently got a small win when the state Supreme Court ruled to close a loophole related to pension “spiking,” when employees inflate their earnings in their last year of work via overtime pay or cashing in accumulated leave in order to augment their retirement pay. The bigger problem of mandated benefits remains, but local governments in California can work with this ruling in the meantime to find savings and create a fairer system.
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Chelsea Lawson is a Senior Associate at Cityfi, an urban change management firm, where she specializes in data and smart budgeting. She lives in Santa Monica, CA.
