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Reform on the Ropes in Louisiana – Pension Reform

See Part 1 of this series here.

In addition to reforming the Medicaid system in Louisiana, Bobby Jindal is attempting to reform the state employees’ pension system in Louisiana – a move that conservatives have supported in other states like New Jersey. In order to understand this move, it is necessary to explain how the state pension system works.

In the typical private retirement system, the employee contributes a certain portion of their paycheck (say 6%) to a 401(k) or similar-type fund. The employer often matches some or all of this contribution and the employee’s money and the employer’s money are together placed into an account, which the 401(k) administrator then invests in mutual funds or bonds or whatever. At retirement, whatever is in the account is what the worker has to retire on; if the investments in the 401(k) have tanked, or if the employee’s contribution throughout his life was insufficient, then too bad – the employee will just have to live on less in his retirement.

In a pension system, however, the employee’s retirement benefit is defined. What this means, in the context of Louisiana, is that once an employee has worked for the state for 40 years, he is entitled to 100% of his highest salary level per year until death. In other words, if you begin work for the State of Louisiana at age 22, you can retire at 62 and draw your full salary at your highest level for the rest of your life. Where does the money come from for this type of benefit? Well, similar to the private model, the employee contributes a certain percentage of their paycheck to a pension account – in Louisiana, that amount is currently 8%. The State of Louisiana (read, Louisiana taxpayers) then chip in an amount that in recent years has varied somewhat but has been consistently been above 20% of the employee’s paycheck. In other words, Louisiana taxpayers do more than just match the employee’s contribution, they more than double it. SImilar to a private 401(k), the money that is contributed by the employee and the money contributed by Louisiana taxpayers is likewise invested with the idea of growing the overall fund.

However, that is not all. Because the pension is a defined benefit, at the beginning of each fiscal year, the State of Louisiana must budget for the amount of retirees who are projected to draw pensions in that year. At this point, in a private retirement plan, if the fund amount for a private employee was insufficient (because, for instance, the retirement fund had taken a bath in the stock market, as most people’s 401(k) has recently done), then the retiree would simply have to figure out how to live on less retirement money than planned. However, in Louisiana’s pension system, Louisiana taxpayers are required to chip in again in order to fund any shortfall. Thus, while the vast majority of Americans are making plans to live on less during their retirement, Louisiana state employees have a taxpayer-backed guarantee as to the size of their retirement.

Currently, Louisiana state taxpayers are funding approximately 70% of the bill for the retirement pensions of Louisiana state employees, and the employees are funding approximately 30% – one of the highest taxpayer contribution ratios in the entire country. The effect of this is that Louisiana taxpayers are matching the contribution of Louisiana state employees to the tune of a stunning 233% – not a bad gig, if you can find it.

Given Louisiana’s budget difficulties – which are chronically exacerbated by the ballooning cost of paying for state workers’ pensions, Governor Jindal has proposed an increase in the state employee contribution from 8% to 11% – a move that would save the state $24 million dollars in an already cash-strapped budget. This is a similar move to Chris Christie’s attempts in New Jersey to get state worker pensions under control – attempts which have been widely praised by conservatives and vociferously opposed by the arch-enemies of conservatism: state employee unions.

Louisiana House Speaker has, in the name of fiscal conservatism, inexplicably come out on the side of AFSCME and LASERS (the Louisiana State Employees Retirement System)*, declaring that this proposed reform amounts to a “payroll tax on state workers.” This, of course, is nonsensical. Unlike a payroll tax, the state employees’ contribution to their own retirement program is not merely withdrawn and then paid back through a social security-type program that can be adjusted or eliminated entirely at the whim of the legislature. Rather, it is their own, protected benefit. A participant in the Louisiana state employees’ pension system may withdraw from the pension system at any time and the state will cut them a check for the full amount of the money they have put into it, regardless of whether their contribution is actually now worth less because their investment has lost money in the stock market. You and I cannot tell the Federal government that we are withdrawing from social security and ask for a full refund of all our payroll taxes. Well, we can ask, I guess. If anyone wants to try it, let me know how it turns out.

Another point of evidence indicating that this reform is not a tax is the fact that on five previous occasions, the Louisiana legislature has passed bills which originated in the Senate which required state employees to increase their contribution to their pension accounts. By law in Louisiana, tax bills may only originate in the House.

Tucker’s decision to falsely characterize this as a tax may have further consequences. In Louisiana, tax increases require a concurrence of 2/3 of the legislature to pass, rather than a simple majority. In other words, as hard as conservative governors throughout the country have fought to control pension costs and battle government employee unions, Jim Tucker is fighting tooth and nail to kill these reforms and align himself with state worker unions.

Additionally, Tucker’s staunch belief that requiring state employees to increase their pension contribution amounts to a “payroll tax” which should be opposed by fiscal conservatives appears to be a somewhat recent discovery. A Republican official in Louisiana informs me that 14 total bills have come forth in the last decade seeking to require state employees to increase their pension contribution (including the 5 mentioned earlier which originated in the Senate and thus were clearly not tax increases). Jim Tucker voted for 13 of these bills.

Private employees all over the country have spent most of the last three years watching their 401(k) balance sheets disintegrate in horror and have been forced to make a choice between either contributing more to their 401(k) or accepting a less comfortable retirement. Louisiana state employees are completely protected from the prospect of a less comfortable retirement, but are being asked to increase their contribution like many Americans. Given that the pension is a protected benefit to which the state employee has access at any time, Tucker’s characterization of the increased contribution as a “payroll tax” is absurd, and his alleged “fiscally conservative” objection to it in the name of being opposed to “tax increases” is even more nonsensical.

Even if one grants the false premise that this is a payroll tax increase, it is beyond dispute that some taxpayers somewhere are going to have to make up the shortfall in unfunded liabilities – either the state employees themselves or the Louisiana taxpayers as a whole. Thus, the choice is not between doing nothing and increasing the state employees’ contribution, the choice is between paying for the shortfall with actual tax money and increasing the state employees’ contribution.

Fiscal conservatives all over the country have recognized the reality that in these tough economic times, state employees will have to participate to some degree in the belt-tightening that we all feel. Jim Tucker has decided to align himself with the state employee unions and associations who are fighting fiscal conservatives.

*A relatively small percentage of Louisiana state employees are actually unionized. However, Louisiana state workers are represented by the LASERS system which lobbies, advocates, and agitates with the public on their behalf, similar to unions like AFSCME.

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