Monday, December 13, 2010
Social Security is supposed to be a safety net for workers. But the City of San Diego doesn’t pay into the system. Now that there’s talk of replacing city pensions with 401(k) plans, is it time for San Diego to rejoin Social Security?
SAN DIEGO Social Security is supposed to be a safety net for workers. But the City of San Diego doesn’t pay into the system. Now that there’s talk of replacing city pensions with 401(k) plans, is it time for San Diego to rejoin Social Security?
Here’s a little history lesson: In 1935, the United States established Social Security. It was supposed to ensure that people who worked all their lives would have some money to fall back on when they got old. Employer and employees paid into the system. But in 1978 the City of San Diego decided it wanted to save some money, and chose not to pay into Social Security.
The city was facing a $3 million Social Security bill. Judge Larry Stirling, a councilmember at the time, said the council thought San Diego could do a better job managing its employees' future retirement.
“Of course it’s a lot of money, but that’s not the issue,” he said. “The issue was you’re sending money off to a Ponzi scheme in Washington that you may or may not collect on.”
So the city made a deal with its employees. San Diego would keep contributing to employee pensions but stop paying into Social Security. In exchange the city would provide its employees with retirement health care for life. Back then health care didn’t cost as much as it does today. Still, former City Manager Jack McGrory said, in hindsight, promising free health care for life probably wasn’t a good idea.
“That clearly was the beginning of a major, major liability. And that liability has increased over time,” he said.
Fast forward 30 years and the cost of retiree health care plus the city’s massive pension costs are crippling San Diego. And city leaders are looking for any way they can to ease the burden. The latest plan from Mayor Jerry Sanders involves completely eliminating pensions for new hires (excluding police officers and fire fighters) and switching to an all 401(k) system.
“The notion that all public employees should have a richer retirement benefit than the taxpayers they serve, while now also enjoying comparable pay and great job security, is thoroughly outdated,” Sanders said.
That concept likely sounds reasonable to you if you work in the private sector. You probably have a 401(k) or similar plan. You and your company both make set contributions into the fund. That money either shrinks or grows depending on the stock market. But you and your company are probably also paying into Social Security, which means you’ll draw a check from Social Security when you're in your 60s.
That’s where city employees are different. Remember, they don’t pay into Social Security. So the question is, if the city does go forward with the mayor’s 401(k) plan, should it get back into the Social Security system as well? The answer depends on who you ask.
Lorena Gonzalez, with the San Diego and Imperial Counties Labor Council, said switching to a 401(k) and not joining social security is immoral.
“I can’t imagine that anyone would want seniors to live with only a 401(k) when we saw during the recession what can happen to individuals' 401(k),” she said. Gonzalez said Social Security acts as a safety net for seniors.
But financially, the move may not make sense for the city. The contribution it makes toward city pensions, and the contribution it would have to make for Social Security plus a 401(k) would be roughly the same. The city would only save money if it offers the 401(k) plan without paying for Social Security. And any way the city goes it still has to make up for the underfunding and stock market losses that have decimated the pension fund over the past few decades.
But Political Scientist Vladimir Kogan said whether the city should get back into Social Security may not even be the right question. Instead he said there’s another question the city should be asking.
“What sort of benefits do you have to give employees to attract the very specialized employees that you need? You need engineers, you need planner, you need police officers,” he said. “And at some point that wage and those benefits are going to be determined by the market.”
The city attorney’s office said it would be legal to stay out of the Social Security system if the city’s 401(k) contributions are generous enough to make up for the lack of the safety net Social Security provides. But if San Diego leaders decide they do want to rejoin the system, city employees will have to vote to opt back in, just like they voted to opt out 30 yeas ago.