When it comes to retirement benefits, public employee unions have one thing right: We should not eliminate traditional pension plans.
If anything, we should move in the opposite direction, making available stable retirement income for all workers, public and private.
But that doesn't mean expansion of the current public sector pension debacle into the private sector. It means development of a reasonable and affordable plan for all.
To understand the argument for making pensions more widely available, consider the available options:
If you have doubts, look at your annual Social Security Administration statement and ask yourself if you could live off what you're expected to collect. Yet for half of private sector workers, that's their only retirement plan.
In other words, if you knew you were only going to live another five
Only 18 percent of private sector workers participate in traditional pension plans, according to March 2011 numbers from the U.S. Bureau of Labor Statistics. But 78 percent of state and local government workers do.
There are great advantages to traditional pensions. Retirees receive dependable streams of income for the rest of their lives. They don't need to guess how long they'll live to determine how much savings to tap each month.
This is made possible by the pooling of longevity risk: By bringing together large numbers of people, the plan can make financial projections based on the average life expectancy for the group.
But there is other risk. Most notably, pension plans depend on uncertain investment returns to help fund the benefits. In the public sector, pension plan boards and administrators have been wildly optimistic and irresponsible about those investment forecasts.
When those investments don't pan out, someone has to make up the shortfall. In the public sector, that burden falls on taxpayers. In California, they've been stuck with a debt of about $250 billion to $400 billion, depending on the underlying assumptions. That works out to about $20,000 to $32,000 per household.
Not surprisingly, the public sector experience has soured many on traditional pensions. The reality is that public employee unions, with the help of sympathetic lawmakers, got greedy. They created a system of unaffordable benefits and unrealistic accounting. Future generations of taxpayers will be paying dearly for the mistake.
It's unfortunate. It may have shut off opportunity to revive pensions for private sector workers. Few employers want to touch them. And many pension critics now advocate eliminating them for public sector workers.
But, theoretically, there remains a way to shield both employers and taxpayers from risk. Pension plans could be constructed to rely on conservative investment projections. If even those fail to materialize, retirees would bear the burden with reduced pension payments.
It's not perfect. But it would be a tremendous improvement over the current system. As one thoughtful pension expert told me, "We need to find some compromise between the total security blanket in the public sector and being completely naked."