Milken Institute
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Hybrid approach may be the future of public pensions
By: Milken Institute
October 20, 2010
Switching to a hybrid plan that calls for the state and its workers to share investment risks could be the way to fix California's underfunded public pensions in the long term.

Generally this type of plan guarantees a basic pension benefit or a minimum rate of return on pension contributions that are risk-free to the employee, similar to a defined-benefit plan. But the employee has to bear the investment risks for a portion of their future benefits, similar to the defined-contribution plans that are favored by most private employers.

Most panelists at a State of the State Conference session on pensions voiced cautious support, but the devil appeared to be in the details.

For State Treasurer Bill Lockyer, the question is, "Who's going to manage the risk? If you dump it just on individual investors with a 401(k), bad idea." Lockyer said the costs of administration in a 401(k) plan are much higher than the costs of the existing system. He suggested that CalSTRS, for instance, rather than a private firm should run the 401(k) to minimize administrative costs.

Like Lockyer, Jerilyn Harris of CalSTRS was concerned about workers carrying too much of the risk. "We're not good at following investments," she said. "All of a sudden we realize we're five years away from retirement, and, 'gee, I hope someone took good care of me.'" Harris also hinted at the political difficulty of altering the existing system, saying stakeholders have to be convinced that the problem is real and that "we're not going to be investing our way out of it."

Jon Hamm of the California Association of Highway Patrolmen said his union has already sacrificed as one of the numerous labor organizations that made concessions for the good of the state budget. While CAHP's givebacks were painful, Hamm remains concerned about the long-term solvency of the system as the baby boomers retire.

State Sen. Dennis Hollingsworth said the pension reforms included in the most recent state budget were significant. "The real question is, what are we going to do to get all the way there? I think we have to be looking at some type of alternative such as a hybrid plan, and we have to look at continuing to really rate how much of a benefit can we afford as taxpayers."

Scott Minerd of Guggenheim said a hybrid plan makes sense, but the state has to make these decisions sooner rather than later. "The problems the state is facing are easily fixable if we start on it now," he said. "If we wait another 10 years, it will be extremely hard to fix."

Watch the video to see Hamm explaining why he discouraged his son from a career in law enforcement and Lockyer discussing the parity of public- and private-sector retirement benefits, among other highlights.