Yesterday was an incredible day for news, and my head is still spinning. And some of the news content has given me a theory, which might explain Governor Scott Walker‘s stubbornness about refusing to yield on the collective bargaining issue. It is only a theory now, but if I am right – then Walker may have stepped on the proverbial bee hive. The nuggets of information in the news content:
1. Huffington Post blogger – Zach Carter posted something interesting about the financial health of the Wisconsin Retirement System (WRS) and its ability to pay current and future retirement benefits.
3. The main point of the two articles, was that the Wisconsin Retirement System is very close to being 100% funded for current and future retirement benefits.
These facts, caused me to ask “Does the Wisconsin retirement plan have excess assets that could be re-captured by the state government if they terminate the plan and replace it with a different type of retirement plan?
Time for a little history lesson. Back in the late 1980′s to early 1990′s, a lot of American companies were still providing retirement benefits for their employees with plans that provided annuity income when the employee retired. The IRS and Dept. of Labor considered this type of plan to be a safer and more valuable benefit than account balance plans. It reduced the risk to employees of fluctuations in the stock market, because retirees are guaranteed a monthly or annual income, and the retirement benefits are not affected by market losses or gains.
But, a significant percentage of these plans were over funded back then, which made these plans targets for employers wanting to recoup the excess assets. And the recovered excess assets were significant – many times it was in the millions of dollars. The only way an employer could recover these assets was through terminating the plan, paying out the accrued benefits to the employers through lump sums distributions or purchasing deferred annuities. Once the plan had paid out the benefits accrued by employees – the remaining assets would revert to the employer (i.e. the plan sponsor) and would flow back to the corporate balance sheet. The excess assets could not go to the employees, it was prohibited because of the way these plans are legally structured.
Think Gordon Gekko and the first Wall Street movie. Most of the terminated plans were replaced with less expensive 401k plans, mostly funded through employee contributions. And the responsibility for managing the growth of the these funds were left to the employee.
I think we all know how that worked out, through the dot com bubble, 9/11 and the 2008 financial crisis.
On to Page Three of Governor Walker’s Budget Bill, third paragraph from the top, there is very interesting language that leads to the very important question for Governor Walker. The paragraph mandates that a study of the existing Wisconsin Retirement System be performed and it must “specifically address establishing a defined contribution plan as an option for WRS participating employees” and the deadline for completing this study is June 30, 2012. I don’t think that Walker would be adding retirement benefits for workers - so I am wondering if the Republican Governors that are trying to get rid of collective bargaining of retirement benefits, so that they can terminate the existing plans and recover excess assets for their state balance sheets.
If Governor Walker’s bill passes, and collective bargaining of retirement benefits is eliminated, then next year Governor Walker can decide it is in Wisconsin’s best interests to get rid of the existing plan and replace it with something less valuable for the employees. And the employees would have no say and no one can keep Walker from raiding your retirement savings.
Again, hard-working Americans are getting the short end of the stick. Do you think this is the American Way? We need to ask Governor Walker if he is planning to get rid of the existing Wisconsin Retirement System and raid your retirement plan!