INDIANAPOLIS (WISH) – A proposal that would begin eliminating Indiana’s traditional public pension plan appears to be headed for a legislative compromise.
Rep. Woody Burton (R-Whiteland) proposed phasing out the state’s current pension system, known as a defined benefit system, by requiring any new public employees, including teachers, to enroll in a “401k-style” plan instead. In that system, known as a defined contribution system, employees would contribute to their own retirement accounts, as most private sector employees now do.
That plan would eventually phase out defined benefit “traditional” public pensions through attrition.
But, state and local labor unions were not on board with that option, Burton says. So, he proposed a compromise, in the form of House Bill 1481 instead.
“We had a ton of resistance on that, which I anticipated,” he told I-Team 8. “So, the compromise is: we offer a voluntary program where they can opt in. We already have it for Indiana Public Retirement System public employees, but we don’t have it for the teachers. So, this would give them that option.”
Burton said he’ll also push for additional incentives to be added in to the bill to entice additional employee participation.
“We need to raise the ante a bit,” he said. “So, for every dollar an employee puts in, they can get two dollars back on return on the investment up to 7.5 percent of their income. And, that’s very attractive.”
Burton says the change is necessary to protect taxpayers and public employees from the threat of bankruptcy to the system or default in payments.
“If they manage the thing properly, they’re not going to lose. When you have a defined benefit program and you guarantee a rate, you can lose. That’s what happened to Detroit. And, the problem with defined benefit in a place like Detroit or Delaware is – when they have an economic problem, they start laying off people. The defined benefit program is supported by employees paying into it for the people that are retired. Well, if the people paying into it are released, leave or their job goes away, where is that money going to come from?”
The proposed shift to a defined contribution system follows reports from I-Team 8 last year that exposed serious concerns about the state’s retirement system paying some annuity benefits at nearly double the rates offered on the private market. That caused the current pension system to pay out $143 million more than it was taking in.
At the time, I-Team 8 found calls to privatize the system would also have drastically reduced the value of some public employee’s annuity savings accounts by as much as 25-30 percent, unless they chose to retire prior to the planned switchover.
Legislators finally agreed on a compromise that will step down INPRS rates to 5.75 percent in 2015. Further rate cuts will take effect in coming years, tied to market rate fluctuations.
House Bill 1481 is set for debate on the House floor next week.