Public pension systems across the country are stretched to
the limit, paralyzing state economies. Yet, future
pensioners and their advocates seem hell-bent to cling to their
sinking ships. The reason for this seems simple: pensioners want to believe that state laws give them
control over their future. And, like sailors on a sinking ship,
the higher the waves rise, the tighter they hold on.
Some state pension systems have converted
to defined contribution plans, while others have seen legal
challenges to pension levels and rights previously
guaranteed in state constitutions—all in response to the
undeniable economic realities.
Still, there are hold-outs, who despite those realities,
double-down on legal and political institutions over which
they have no real control.

In a recent editorial, “
401(k)s
Aren’t The Solution To Illinois Government’s Pension Woes,”
the Chicago Sun Times warned readers not to believe
gubernatorial candidates that a shift to 401(k) accounts for
retirees would solve the current pension crisis in the
state.
Specifically, the Sun Times editors warn that moving to
401(k)s would sacrifice the “control” large pension funds
have over fund managers, and that without FDIC regulation,
pensioners could potentially “lose all their money” in a
market downturn.
Even if pension boards could influence mutual fund managers
or their bosses (the state of Illinois’ entire pension
system makes up less than 1 percent of Fidelity’s mutual
funds under management), no single investor has a prayer of
controlling institutional movers.
Once an employee becomes part of the pension system,
their retirement is basically in the hands of others, no
matter if they live in Illinois, a state going bankrupt in
overdue pension obligations, or in neighboring Wisconsin,
whose pension system is close to fully funded, but whose
benefits may not compare.
According to a Bloomberg report
last year, situations in New Jersey, Kentucky, Colorado,
Connecticut and about 40 other states are comparable.
Indeed, the very fact that the Sun-Times editorial board
considers it necessary to advocate for maintaining their
state’s present system seems to admit that the system is not
necessarily in anyone’s control, and that condition is
relatively the same in most of the nation.
The lesson, as we see it, is to discover what we can control
to achieve a secure retirement.
Employees with state pensions may have a “guarantee,” but
the truth is that those who must ultimately make good on
that guarantee are not in control of legislative, political
or macro-economic forces that will be in play when the
pensioner become eligible to collect.
By contrast,
employees saving for retirement with a
401(k) or similar vehicle do have control over three things:
1) How much they
save
2) Their
lifestyle—before and during their retirement
3) The way they
invest
Compass Investors’
Retirement Outlook Calculator (“Your Compass”) can
demonstrate the impact of each of these factors on any
employee’s retirement future, but two factors differentiate
this model from any pension system right away.
- First, while state legislators or unions may borrow
from funds that should be used to shore up pension systems,
exacerbating their shortfalls, individuals have control over
the amount and frequency of their contributions to their
retirement plan.
- Second, while pension systems are limited by legal
regulations in the kinds of investments they can make, most
importantly in bull markets, individuals are more free to
take advantage of market run-ups, or free to go to cash when
necessary, to grow and preserve their savings.
So take control: if you’ve got a new job working for state a
government with the option to go self-managed, find out how
well that system is funded. If it’s in the red, get some
help, and jump that ship before it’s too late. If you’ve got
an IRA or a 401(k), don’t “set it and forget it.” Find professional advice that will help you keep your money
moving with the market, taking advantage of those slow
moving ships of state.
The Sun-Times editorial actually adds a fourth area of
control—the decision of
when to retire—arguing that given
the chance, employees seek to retire when the market booms,
leaving the economy short of workers. But if most state
employees do not run up against a mandatory retirement age,
employees in the private sector are much more likely to be
shown the door when the value of their “experience” falls in
relation to salary and level of energy.