(NASHVILLE, TN) December 22, 2011 – State Senator Brian Kelsey (R-Germantown) announced today he has introduced legislation that would reform the way pensions are calculated for new state employees. The plan would be offered for new state employees but not for local government employees or for education workers. Kelsey said the proposal would establish a privately managed cash-balance plan to eventually replace the Tennessee Consolidated Retirement System defined benefits plan, participation in which would continue to remain available for current employees.
The legislation is the tenth in a series of announcements by Kelsey in his “12 for ’12” initiative for the next legislative session, which is set to reconvene January 10, 2012.
“It’s time for the General Assembly to discuss the future of state pensions,” said Senator Kelsey. “State leaders, Democrat and Republican alike, have done a great job of giving us a retirement system that is currently fiscally sound. But changes need to be made if we want Tennesseans to say the same thing of current leaders thirty years from now.”
The cash balance plan would guarantee full funding of the state pension system for current state employees. New state workers would receive 6% to 15% of their salary in a personalized account guaranteed to be there when they retire. The accounts would be aggregated and professionally managed for employees to reduce risk of loss. The Treasurer would choose among competing fiscally sound money managers for the one who guarantees the highest annual rate of return for workers. Therefore, risk in the market would be born by the fund manager rather than workers.
The state contribution for new employees would begin at 6% but rise to 15% as the funds which are necessary to pay pensions under the old system decrease.
In the last decade, at least 12 states have introduced some kind of defined-contribution plan such as a 401(k). Michigan and Alaska now require all new hires to join the defined contribution plan. Oregon, Utah, and Indiana require workers to participate in a “hybrid” defined benefit-defined contribution plan. An additional eight states have retained their defined benefit plan and simply offer the defined contribution plan as an option to their employees.
Among the criticisms of the traditional defined contribution plan is that proper management requires a great degree of financial literacy by the employee. That employee alone faces the risk of poor investment returns, the risk that they might outlive their assets, and the risk that inflation will erode the value of their income in retirement.
“This plan would ensure that our state employees are not alone in planning for their retirement,” concluded Kelsey.