Grover Norquist’s Proposal to Raise Taxes
Recently, in an interview with Ira Glass on This American Life, Grover Norquist — the famed founder of Americans for Tax Reform, and organizer of the Taxpayer Protection Pledge, which asks political candidates across the United States to commit themselves in writing to oppose any and all increases in taxes — argued that one of the most fundamental reforms necessary to shrink the size of government is to move all state and local government employees from publically funded pension systems to 401(k) plans.
At this point, the problem with state and local government pensions is not a matter of partisan debate. All sides agree that pension liabilities are one of the most daunting issues facing state and local governments. Many states and cities underestimated how much money they would need to pay out in the coming decades and overestimated future tax revenues (municipal finances are heavily tied to the property tax) and the returns on pension fund investments. According the Pew Charitable Trusts, about 31 state pension plans are now under the 80 percent funding level that is generally recommended.
The move from defined benefit pension plans to defined contribution plans, however, is not as easy as Norquist suggests.
The catch: changing to a 401(k) system costs way more in the short term. Unless we expect current workers to take a significant cut in their take-home pay, their salaries would have to be increased so that they could afford to contribute to the new 401(k). In addition, the state or city would need to pay the employer contribution above and beyond the base salary (Norquist recommended 10 to 12 percent). And this doesn’t even take into account the fact that cities and states would still have to fund existing pensions of current and soon-to-be retirees.