For Immediate Release:
February 14, 2006

Contact: Susan Martin, Press Office
415-955-6120 or smartin@pacificresearch.org

According to a New Study by the Pacific Research Institute

SAN FRANCISCO – California state workers under age 50 who work for a period of 10, 15, or 20 years would potentially receive a higher retirement income if California switched from its current defined benefit (DB) plan to a defined contribution (DC) plan, according to a new study by the Pacific Research Institute (PRI), a free-market think tank based in California.

“Pension Intervention: Reforming California’s Public Employee Retirement Systems,” co-authored by Anthony P. Archie, business and economics fellow at PRI, and Peter J. Ferrara, a senior fellow at the Institute for Policy Innovation, is available at www.pacificresearch.org.

Given that three out of four state employees leave public employment before retirement, Archie and Ferrara estimated that 120,000 state workers would receive greater retirement income under a DC plan compared with the current DB plan. Moreover, an employee leaving after 10 and 15 years of service would potentially receive double the amount under a DC plan.

* The methodology of these calculations can be found in the report “Pension Intervention: Reforming California’s Public Employee Retirement Systems,” available at www.pacificresearch.org.

“The current system locks employees into a rigid benefit calculation that deprives some workers of achieving greater investment gains,” said Mr. Archie. “While a small minority of workers benefit under the current system, the majority of workers – particularly younger workers who enter government service for a short period – are potentially better off in a defined contribution plan.”

Long-term workers who enter state government in their 20s and 30s and retire at age 65 would also gain under the DC plan. According to the study, an employee who works for the government for 40 years can potentially earn $47,000 annually in lifetime benefit beginning at age 65 under a DC plan compared with $32,000 under the current DB system. An employee working for the state for 30 years could potentially receive $27,000 under a DC plan versus $24,000 under the DB plan. “Given that roughly 56,000 of current state employees will stay in their jobs until retirement and that Generation X-ers and Y-ers make up roughly one third of the total state workforce, 18,600 additional workers would gain under a DC plan if they chose to retire at age 65,” Mr. Archie said.

“These assumptions, taken together, lead us to conclude that about 60 percent of California’s state employee workforce would gain under a DC pension plan,” Mr. Archie said.

Archie and Ferrara also make the following arguments for switching from a defined benefit plan to a defined contribution plan:

1. The current DB pension systems are inherently unstable and unpredictable, leaving governments at risk of defaulting on their obligations and public employees at risk of a reduction in benefits.
2. The DB pension systems are an increasing burden on state and local government budgets, which means that taxpayers will have to pay more to keep the system running. For example, CALPERS (California’s Public Employment Retirement System), had a shortfall of $1.3 billion in 2005.
3. The pension systems are outdated and inappropriate for a modern workforce, placing public employees at a disadvantage compared to their private-sector counterparts.

“Our study makes it clear that a defined contribution plan for state workers would not only relieve the burden of California taxpayers, but provide a more secure retirement for the majority of state employees,” said Mr. Archie.

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About PRI
For 27 years, the Pacific Research Institute (PRI) has championed freedom, opportunity, and individual responsibility through free-market policy solutions. PRI is a non-profit, non-partisan organization. For more information please visit our web site at http://www.pacificresearch.org/