Take it public: group offers novel US retirement route

WASHINGTON, Sept 15 Thu Sep 15, 2011 10:00am EDT

WASHINGTON, Sept 15 (Reuters) - A flood of U.S. retirement is threatening to burst its dam and drown aging Americans with rising living costs, but one group is proposing a novel way to protect private-sector workers: invest in public pension plans.

The National Conference on Public Employee Retirement Systems proposed "the secure choice pension," to allow small- to medium-sized firms to buy into public retirement funds.

"Currently, there's a retirement deficit of over $8 trillion... that stems from the lack of pensions in the private sector and small 401k accounts," said NCPERS Executive Director Hank Kim, the architect of the plan, on Wednesday.

About half of private sector employees have employer-sponsored retirement plans, mostly 401ks, where they and their employers contribute money to purchase investments.

In contrast, 85 percent of public sector employees participate in defined benefit plans, which are traditional pensions that pay retirees a fixed amount, according to the National Association of State Retirement Administrators.

The financial crisis destroyed the value of investments in many 401ks, a name referring to their place in the tax code. As a result, some workers delayed retirement or returned to work after retiring to rebuild their nest-eggs.

Meanwhile, Social Security, federal aid for the aged, expects a surge in demand in coming decades from nearly 78 million retiring "Baby Boomers."

Because of declining death rates, the generation born after World War Two will draw benefits longer.

"Many Baby Boomers will live their retirement years in poverty and needing government assistance, or cling onto their jobs not because they want to...but because they have to," Kim said.

Moreover, small businesses say administering retirement accounts is costly, and younger people are struggling to find jobs with the unemployment rate stuck above 9 percent, let alone jobs with full benefits.

Under the "the secure choice pension" proposal, states would open retirement systems to contributions from companies that lack pension plans. Employees would be fully vested immediately and amounts contributed to the plans plus earnings would be guaranteed.

The U.S. government would have to tweak its compensation laws and states would have to pass legislation allowing the scheme. The organization, which represents public pension plans, said it was talking to two to three states.

But the biggest hurdle to the plan may be public opinion. Over the last year, public pensions have become a subject of national controversy.

Almost all public pensions can pay benefits for current retirees, but the system in Central Falls, Rhode Island, recently contributed to the city's bankruptcy filing. Former workers may not receive any benefits.

The recession that officially ended in 2009 created a triple threat for pensions. Governments cut contributions for public pensions, layoffs meant fewer employees made contributions and investments providing the bulk of funding plunged.

Estimates of future public pension shortfalls range from $700 billion to $1 trillion, depending on how investment returns are estimated.

But of late, the returns on investments have come galloping back, and public retirement systems have grown for six straight quarters.

"The vast majority of pension plans are well-funded," said Kim, adding they have the advantage of professional managers.

A poll conducted by the National Institute on Retirement Security earlier this year shows the proposal may appeal to private-sector workers. It found 84 percent of Americans believe people with pensions will enjoy a secure retirement and 81 percent believe all workers are entitled to pensions. (Editing by Theodore d'Afflisio)

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