James Madison Institute issues report calling for immediate state pension reform

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Public pension reform has been a key issue for The James Madison Institute, a group recommending Florida immediately privatize all government pensions to keep the retirement system solvent.

On Tuesday, the Florida-based research and educational organization devoted to limited government, financial freedom and individual liberty released its latest policy brief, “Florida Retirement System Reform: Why Now?

The report urges Florida to deal with continuing issues related to the state pension plan right now, even as proposals face Florida lawmakers during the 2014 Legislative Session.

“The time to look at reform is not after the system is broken, but before it runs into problems. We’ve heard that many times, but that’s because it’s just good common sense,” said JMI CEO Dr. Bob McClure in a statement. “We trust that the Florida Legislature will heavily consider problems that have plagued other pension plans and be proactive to design a system today that will not run into those same problems in the future.”

Among the recommendations in the report is that Florida’s Retirement System must move quickly to a “defined contribution plan” to avoid continuing the unfunded liabilities from the current defined benefit scheme.

Defined contribution plans, which are similar to a 401 (k), is where both the employee and the state contribute on a regular basis. Individual accounts are set up for participants and benefits based on both the amounts credited to these accounts, as well as any investment earnings on the money in the account.

Only state contributions to the account are guaranteed, not future benefits. In defined contribution plans, future benefits may differ, due to varying investment earnings.

Although opponents of reform maintain the current system is 85 percent funded and remains financially sound, JMI points to the fact that the Legislature invested $500 million last year to offset underfunding. Florida’s pension plan may be in better shape other states, the report says, but a process requiring that kind of financial support — especially in a year when the S&P 500 stock index rose 30 percent — is not financially sound.

JMI suggests the state become proactive in keeping pension system solvent, rather than waiting until a crisis occurs, by changing to defined contribution. They add that the plan offers benefits for employees often overlooked in debates, such as maintaining the financial stability of a single account, rather than relying on financial security of the full state pension system.

“Many private companies offer federally-insured defined contribution pension plans,” said report author Dr. Randall Holcombe, a JMI senior fellow and professor of economics at Florida State University. “There is no reason for the FRS to manage those accounts.”

“Workers could choose the firm that would manage their pensions,” Holcombe continues, “and typically, such plans offer workers a variety of investment alternatives for their pension plans. This would put both Florida and the state’s public employees in a better position without the current risk of compounding unfunded liabilities that take funding away from important public services.”

The full policy brief is available online at www.jamesmadison.org.

Phil Ammann is a St. Petersburg-based journalist and blogger. With more than three decades of writing, editing and management experience, Phil produced material for both print and online, in addition to founding HRNewsDaily.com. His broad range includes covering news, local government and culture reviews for Patch.com, technical articles and profiles for BetterRVing Magazine and advice columns for a metaphysical website, among others. Phil has served as a contributor and production manager for SaintPetersBlog since 2013. He lives in St. Pete with his wife, visual artist Margaret Juul and can be reached at phil@floridapolitics.com and on Twitter @PhilAmmann.