Former Maryland Gov. Bob Ehrlich clams up when asked how he would pay the for the state’s $1 billion budget deficit — but when it comes to Maryland’s $18 billion in unfunded pension benefits, the Republican gubernatorial candidate says he’s got a plan: 401(k) plans.
“The era of defined contribution is here, and everybody knows it,” Ehrlich said in a debate with Gov. Martin O’Malley. One week before the start of early voting, Ehrlich announced he would require all new state employees to enroll in 401(k) plans instead of traditional pension plans if he is elected in November. O’Malley strictly opposes the move — as do most of the state’s union members.
Maryland currently offers its employees a defined benefits policy — a guaranteed
retirement plan based on the retiree’s years of service and final average salary, plus health care.
“The political question is, why would you do something that would be wildly unpopular with employees when there is no short-term gain for doing so?” asked Ron Snell, a pension expert at the National Conference of State Legislators.
The legislature decides annually how much to pay into the system, giving lawmakers the power to roll back payments when the sour economy decimated
state budgets.
It also enables the General Assembly to boost benefits without immediate fiscal effect, entangling lawmakers in a bargaining match with the state’s voter-rich unions — who control millions in campaign cash.
Now, Maryland’s system is severely underfunded, but public employees have kept their benefits through the recession.
“In general, a defined benefit is considered immortal so it has a long-enough period for time to ride out any problems that could occur,” said Stan Goldfarb, a Silver Spring pension consultant for Horizon Actuarial Services LLC.
On the other hand, 401(k) plans are considered much more volatile for employees, who take on the risk themselves
by investing directly in the market.
Union leaders point out that millions of private employees lost their 401(k) retirement funds in the 2008 market crash.
“I think [401(k) plans] are reckless,” said Patrick Moran, director of the Maryland chapter of the American Federation of State, County and Municipal Employees. “They are totally and absolutely a train wreck.”
But in the private sector, defined benefits plans have become archaic as many employers have switched to the 401(k) — and many states are even beginning to switch to a hybrid 401(k) and defined benefit plan.
Employers offering 401(k) plans cannot deviate from a set contribution amount — making costs more predictable — and payments can’t be “pushed down the road,” said Nate Benefield, director of policy research for the Commonwealth Foundation, a nonprofit that supports pension reform.
But research is divided on which plan is ultimately more expensive and politically feasible — which has proven an insurmountable obstacle so far in the legislature’s efforts to address the growing deficit.
