Op-Ed: A Modest Proposal Regarding Cost-of-Living Adjustments

Charles Ouslander | January 15, 2016 | Opinion
Taking a page from the federal government may be the best way to end the rancorous discussions about the public-employee retirement system

Charles Ouslander is a retired prosecuting attorney.
The recent torrent of news articles, editorials, public debates, litigation, and legislative posturing about New Jersey’s beleaguered pension system has finally crested. It appears highly likely that the Legislature will soon adopt a constitutional resolution to be placed on this November’s ballot mandating that quarterly state contributions be made into the pension system in accordance with actuarial calculations, instead of the random amounts of money occasionally placed into the funds. The state’s abject failure to properly fund the various state-administered pension plans is a bipartisan disaster committed by both the Legislature and several governors over the past 20 years.

I have had personal involvement with the pension system as I am representing myself in a case awaiting a date for oral argument before the Supreme Court of New Jersey (Berg v. Christie). The lawsuit is often known as the COLA case, because it challenges Gov. Chris Christie’s abolishment of cost-of-living adjustments (for people who have already retired), under his 2011 pension-reform law. Through my handling of this case over the years, I have become more familiar with pension law and theory than I ever thought possible. I am writing, however, not to complain, but to suggest a modest proposal in the hopes of salvaging a retirement system that has consistently provided hard earned-pension benefits to public workers for over 50 years. My proposal involves adopting the federal retirement system currently used for civilian employees, for all new hires, once the funding for our pension system has been established via the proposed constitutional amendment.

The survival of the pension funds is essential to providing earned and promised pension benefits to public employees who devoted their working lives in the service of their fellow citizens. In the case of Burgos v. State, our Supreme Court plainly stated the nonforfeitable-right law passed back in 1997 (and since repealed in 2010) provided those public employees with a right to receive their pension benefits (The individual members of the public pension systems, by their public service, earned this delayed part of their compensation.) This means that the State’s obligation to pay retirees their pension benefits when due is legally protected and our highest court has affirmed this principle.

The abolition of COLA payments to those who retired before the 2011 pension reform law is not just unlawful, it upends the deliberate long-term decisions made by public employees to remain in government service. It profoundly affects retirees who may not be able to continue working or would have made different career choices. The COLAs provided to public employees provides a 60 percent change in the inflation rate from year to year. It does not provide for a full adjustment due to inflation, which reduces the value of a fixed pension benefit. Assuming that inflation remained constant at 3 percent each year, and there was no COLA adjustment at all, in 10 years a retiree’s pension benefit would be reduced by about 25 percent of its original value.

The big question now is how to pay for it given the grossly underfunded state of the pension system. The tension between the constitutional amendment mandating regular contributions from the state, on the one hand, and the solvency of the pension system on the other, can only be resolved by changing retirement benefits going forward. I will not address the issue of post-retirement healthcare benefits, as that is clearly a national problem requiring a national solution (in my opinion, a single-payer system as most other industrialized countries have).

I am suggesting that while the proposed constitutional amendment is debated and awaiting a vote, that the Legislature take the time to pass a bill revamping the pension system, but making it

legally effective only if the proposed amendment passes and is made part of the state constitution. This would be similar to the process used to recently enact bail reform in New Jersey with a concurrent statute and proposed constitutional amendment working together. In this way, the current environment of distrust among all stakeholders might be partly alleviated because any negotiated changes to the system would not take effect, unless the constitutional amendment passes.

The federal retirement system provides three separate benefits: 1) a reduced defined benefit (i.e., pension, significantly less than our own), 2) a defined contribution program (similar to a 401k, with solid investment opportunities), and 3) Social Security benefits. These three benefit-vehicles would replace the current defined-benefit program that many state and local employees receive. Since many, but not all, public-safety workers are ineligible for Social Security when employed, the proposed changes might have to increase the defined-benefits component of the federal system, but it would still be significantly less than the current benefit formula. Of course, the state could also decide to permit entry of public-safety workers into social security and both the employees and the employers would then have to make the required contributions as everyone else does.

This three-legged stool, as it is known, would provide a combined retirement program that includes a small pension allowance; a defined-contribution account with contributions from both the employee and employer, subject to investment returns; and Social Security benefits. The defined-contribution account and Social Security are portable and may be taken with an employee to another job before retirement on the pension component. Admittedly, some of the risk borne by the state will now be shifted to employees as the pension component is smaller and the defined-contribution account is subject to the vagaries of the stock market. However, this is part of the price for insuring that the legacy payments legally required for prior retirees are paid and making sure the state can afford to pay retirement benefits for everyone in the foreseeable future.

There are many details to be worked out in transitioning to such a system. Some of the issues would include limiting the investment vehicles for the defined-contribution component to primarily index funds (both stocks and bonds), insuring that all monies held by the state are designated and actually treated as trust funds, completely redesigning the investment council to insure that pension funds are also conservatively and appropriately invested, and drafting laws to ensure that employees have both legal protections and more control over the retirement system to prevent a repetition of the current crisis.

My goal is to invite a serious, respectful, and productive discussion among all stakeholders — public employees, taxpayers, state representatives, and all citizens — to work through what has needlessly become a contentious and financially threatening problem for the wellbeing of New Jersey. The proposed amendment of the state constitution to secure future funding for the pension system is laudable and necessary; however, without a reasonable change in future public-employee benefits, the protection provided by the amendment may be short lived.