Arizona Pension System on Road to Recovery

January 27, 2014

PHOENIX–A new study by the Grand Canyon Institute found Arizona’s public employee pension system is on the road to recovery following The Great Recession.  The study called “Arizona’s Pensions: On Track to Financial Sustainability with Retirement Security” shows reforms already in place, combined with some longstanding sound Arizona practices, have the state’s pension system on solid ground.

The study also analyzed the legislature’s efforts to replace defined-benefit pension programs with a riskier defined-contribution, or 401 (k), retirement plans, and found that switching to defined-contribution plans would actually increase costs to taxpayers.

“Arizona’s public sector pensions are financially healthy compared to many other states,” said Dr. Dave Wells, research director at the Grand Canyon institute, one of the report’s co-authors. “Arizona lawmakers have shown great foresight, and the changes that they have already made will strengthen the plans and make them more financially sustainable for the long term.”

“Almost no public pension dollars go to high-end pensions,” Wells continued, addressing the misnomer that Arizona’s teachers, firefighters, police officers and thousands of other public workers receive lavish pension payouts. “In fact, if Sun Devil Stadium were filled to capacity with Arizona public pension recipients, 181 people in the crowd of more than 70,000 would have a pension over $100,000. By contrast, our report shows that most money in private sector 401(k) accounts is concentrated in a small number of very large accounts.”

While legislators argue that so called pension “reform” is needed to drive down costs for taxpayers, switching new public employees to 401(k) plans would have the opposite effect, Wells said.  By closing existing pension plans to new employees, fund managers could no longer invest for the long-term and investment returns would plunge. Lower returns would ultimately drive up costs for taxpayers.

“It will cost billions to go this route,” Wells said.

By contrast, important pension reforms over the last decade, including significant legislation in 2011, will save taxpayers billions of dollars in the coming decades.

Key findings in the report:

  • Taken together, Arizona pensions are relatively healthy, within 10 percent of the funded ratio that pension financial experts consider healthy.
  • Over the long term, Arizona pensions have had a low cost for taxpayers. And, unlike other public pension plans, if there is an economic downturn, Arizona employees would split the increase in pension costs with taxpayers.
  • Arizona pension plans are modest, averaging only $22,000, and many retirees receiving higher pensions get no Social Security and rely completely on their pension for retirement income.
  • Arizona’s state pension plans now follow National Institute on Retirement Security best practices for public pension plans that will help ensure their financial sustainability in the future.
  • Defined contribution 401(k) retirement plans and other alternatives to traditional pension plans could cost taxpayers billions in transition costs and deliver lower investment returns.
  • Retirement security is at risk throughout the nation, but efforts to dismantle public-sector pensions will only make it worse for the middle class.

Arizona does face a serious retirement security crisis, as does much of the country, but it is not getting as much media attention as proposals to change public employee pensions, said co-author Stephen Herzenberg, executive director of the Keystone Research Center.

“Arizona’s real impending retirement security crisis results from inadequate retirement savings, partly due to the decline in the use of defined benefit pensions in the private sector,” Herzenberg said. “401(k) savings plans have proven risky and inadequate to deliver retirement security.  Properly managed defined benefit pensions are a far superior option for public-sector workers and employers –and for taxpayers. They cost less and do more to protect the modest middle-class retirement that the people who protect our neighborhoods, teach our kids and keep us safe have earned.”

Herzenberg added, “The facts show that Arizona does not need a radical overhaul of its public sector pension plans. In fact, the options on the table to replace Arizona’s defined benefit could deliver a double whammy, increasing costs to taxpayers while eroding retirement security.”