Assembly Offers $120 million Bait to UC to Stop 401(k) plans

The great investor Warren Buffett once said, “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”  UC President Janet Napolitano probably had similar thoughts when she wrote to the Assembly opposing their offer of $120 million to pay down UC’s pension debt on condition that UC stops offering new employees 401(k)-style retirement plans. Napolitano, who is no friend to Wall Street, understands that temporarily plugging the financial holes in UC’s traditional pension plan will never fix it, and that a steady migration to defined benefit plans is the best way to solve its pension crisis long-term.

Dan Morain of CALmatters provides insight on the Assembly’s sudden generosity: “Public employee unions oppose 401(k)-type plans, viewing them as a threat to the pension system that benefits their members…. UC has an $11 billion unfunded retirement liability. Since UC adopted the 401(k)-option plan in 2016, 37 percent of new employees have chosen it.”

And why not?  UC faculty receive a 5 percent match from the university. According to  401(k), the average employer match is about half that at 2.7 percent. So, if a 40-year old professor makes $125,000 a year and puts away $500 each month, by the time he retires at age 65, he will have accumulated $400,000.  If a young professor, age 30, making $65,000 annually puts away $200 a month for the first 10 years, then $500 for the next 25 years, by the time he retires, he’ll have about $600,000.  These calculations assume a 5 percent match from UC and a 7 percent annualized rate of return.

These are nice nest eggs.

We can only hope that President Napolitano can stand her ground against the Assembly. But the unions know in practice another line of wisdom from Buffett, “Nothing sedates rationality like large doses of effortless money.”

Rowena Itchon is senior vice president at the Pacific Research Institute.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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