Government plans lack accountability for those in charge. Their mismanagement threatens recipients' benefits, and often leaves taxpayers on the hook. A plan to switch eligible state and local government workers into alternate plans which they, not the government, own, and which define contributions instead of promising specific benefits, is a critical step towards retirement security.
(Read More: Congress Returns to U.S. Public Pension Battle With New Bill)
The Government Accountability Office (GAO) estimates that about 30 percent of the 14.5 million full-time state and local government workers—e.g., teachers, firefighters, police, etc.—participate in local or state government retirement plans instead of Social Security. Most of those plans are, like Social Security, defined-benefit plans, in which the employer promises to pay retirees a fixed amount, based on some formula, for the rest of their lives.
However, most of those government defined-benefit plans assumed they would be making a rate of return on their investments that they haven't seen in a decade or more—leaving them dramatically underfunded. A 2012 study from the Federal Reserve Bank of Cleveland suggests that the largest 126 state and local pensions were underfunded by $800 billion in 2010, but concedes that some economists put that figure closer to $4 trillion.
But there are three Texas counties—Galveston, Brazoria and Matagorda—that aren't facing a retirement time bomb. That's because 30 years ago they decided to transition to a defined-contribution retirement plan for county workers that mirrored the payroll taxes and benefits of Social Security but avoided the long-term unfunded liabilities. Oh, and those workers have never lost a dime.
What's known as the "Alternate Plan" combines defined-contributions with employee ownership and downside investment protection. Employee and employer retirement contributions are pooled, like bank deposits in a savings account. While these funds are owned by the individual, they don't make investment decisions; that process is actively managed by a financial planner.
Top-rated financial institutions bid on the money, guaranteeing a base interest rate—usually about 3.75 percent—with a market-based performance kicker (i.e., the plan makes more money as the market goes up). Over the last decade, the accounts have earned between 3.75 percent and 5.75 percent every year, with an average of around 5 percent.
Thus, when the market goes up, employees can make more; however, when the market goes down, employees still make something, virtually eliminating the 401(k)/IRA problem of workers deciding not to retire because of a major drop in the market.