Opinion: Public Plans No Windfall for Workers

Written by Dennis Persica 
Original article in The Advocate
September 12, 2013

One of the more interesting philosophical flip-flops in the debate over public-employee pensions is how willing people are to use a level-the-field argument against government workers.

But first, a disclosure: As the surviving spouse of a former state worker, I get a monthly benefit from LASERS, the Louisiana State Employees Retirement System.

Back to the discussion: Look at the comment stream on any online story about retirement benefits for public workers, and you’re likely to see a certain sentiment expressed. It goes like this: Defined-benefit pensions are a thing of the past in private industry, so why should government employees still be entitled to them?

If you raised that “leveling” argument in any other discussion, though, you’d be shot down promptly, and probably by the same people.

Tax better-off folks to pay for government services for the classes below them? Answer: That’s socialism!

Enact affirmative action programs to ensure that opportunities are spread out to an ethnically diverse corps of job seekers? Answer: It’s not about race, it’s about finding qualified employees.

But talk about preserving government pensions, and suddenly we’re fighting like crabs in a barrel, with people demanding that public pensioners be dragged down to the level of private-industry workers who have no access to defined-benefit pensions.

There are a few things to remember about government retirees. For Louisiana state employees, as well as many other public employees across the country, there is no Social Security to fall back on. The same once was true of federal workers; they contributed only to the federal retirement system but not to Social Security. When President Ronald Reagan and a Democratic Congress decided to try to fix Social Security, they required federal employees to contribute to it.

People who’ve spent a lifetime in state or local government service may have only their public pension coming to them. That’s a major difference between those on a public pension and those on one provided by private industry. If the private pension program goes belly-up, the former employee still can draw Social Security.

Another difference between government-pension systems and private-industry pensions is this irony: If a private-industry pension program runs into trouble, its retirees wind up on the equivalent of a government pension, via the Pension Benefit Guaranty Corp. PBGC works as a kind of insurance company (businesses pay premiums into it) and takes over pension systems that run into trouble.

It will pay a retiree a maximum of $57,477 per year in benefits, and that maximum changes every year. So, someone with a pension from a private system that’s run into trouble can be assured they’re not going to be living on the street, begging for food. However, a government employee whose pension plan defaults –— and all eyes are on Detroit at the moment — has no protection. PBGC does not cover public pensions.

Yes, there have been abuses in the system, as we saw a few years ago in Jefferson Parish, but that’s no reason to let public-pension systems wither on the vine. After all, no one’s talking about shutting down Wall Street just because some people occasionally figure out ways to cheat investors.

Usually, the pension abusers are those who have enough political pull to game the system to their advantage. Most rank-and-file public employees don’t have that, and they would be the babies thrown out with the bathwater if we decided to let a troubled public pension system die just because private-industry workers don’t have access to similar plans.


Dennis Persica is a New Orleans-area journalist. In his weekly column, he shares his thoughts and observations about people, places and issues in the New Orleans area. Persica’s email address is dpersica@theadvocate.com.

Pension reform in Pennsylvania will retain defined benefit plan

State legislatures across the nation are grappling with how to adequately fund pension plans. Few have done so in a bipartisan manner. Now Pennsylvania is 99 percent of the way toward achieving a model bipartisan solution.

With final passage of these pension reforms, Pennsylvania's legislature could provide a rare example of lawmakers working together to resolve a pressing problem, delivering a solution that reduces costs for taxpayers, protects retirement security for employees, and strengthens our schools.

 

The reform legislation also calls on employees to contribute more toward their retirement, further reducing costs to taxpayers. Unlike their employers, government workers have never taken a holiday from their pension obligations, contributing up to 7.5 percent of every dollar they earned. Under the reform bill, new employees would contribute more and share some market risk.

The pension legislation is right to retain guaranteed, or "defined benefit," pension payments based on years of service. As Americans were rudely reminded over the past three years, the alternative, 401(k)-type plans can fluctuate wildly and leave retirees vulnerable.

 

Defined-benefit plans are also a better deal for taxpayers, delivering retirement security at a lower cost. That's because the administrative costs and fees attached to 401(k)-type plans chew up retirement savings.

Defined-benefit pension plans also boost a state economy.  They ensure that more retirement savings stay in the pockets of the middle class and go to local communities rather than out-of-state fund managers. Public pension funds can also invest in job-creation projects that have been shown to yield good returns.


 

 

Proposed legislation could affect state retirees

Proposed legislation that would change the defined benefit plan to a 401-K-type defined contribution benefit won’t affect those already in the state’s retirement system—or will it?

The Louisiana State Employees’ Retirement System North Shore chapter of the Retired State Employees Association got an earful Monday from executive director Cindy Rougeou and State Rep.

John Bell Edwards on the proposed legislation that would change the way those entering state employment would have their retirement money invested and a separate move to consolidate all the state employee’s various retirement systems into one.

Edwards cautioned the attendees, numbering about 100, to “be on guard to changes to the system you rely upon. These changes will be to your detriment if passed. A consolidation of all the systems will not save the state money and I will definitely not support this bill.”

The change from a defined benefit plan to a defined contribution plan has not worked in other states and transfers the risk of the investments of retirements funds from the state to the employee.

In fact, Rougeou said it may well cost the state more money if the retirement system fails and retirees have to go on public assistance. There is also a chance retirees would outlive their contribution benefit that would partly be based on actuary tables of average life spans.

Survey: Nearly half of Defined Benefits plans closed to new participants

Forty-four percent of companies with defined benefit plans have closed their plans to new participants, 3% are planning to do so in the next 18 months, 10% are considering it, and 43% have no such plans, according to a Towers Perrin survey.

Sixty-nine percent of companies with DB plans have no intention of making any changes affecting current employees.

Among companies offering defined contribution plans, fewer than 10% have suspended or plan to suspend company matching contributions, another 19% are considering it, and the rest of those surveyed have no plans to do so, according to the survey.

The survey of 480 officials at large and midsize U.S. companies was conducted in February.

Defined-benefit pension is a huge contributor to financial security in retirement

A recent study concludes that households with a defined-benefit pension as well as Social Security and savings are far less likely to outlive their savings than households without a defined-benefit pension.

The study conducted by Ernst & Young LLP examined the retirement savings and other resources for Americans with $50,000 to $100,000 of preretirement income. A couple with preretirement earnings of $75,000 that will have a pension has a 31 percent chance of outliving their assets. That couple without a pension has a 90 percent chance of outliving assets.

The study confirms what Alicia Munnell, director of the Center for Retirement Research at Boston College, has been warning for years - that a smaller role for Social Security benefits, rising Medicare premiums, and disappearing pensions will make the retirement of younger workers far more difficult than those of current and past
retirees.

Report: Defined Benefit Plans Delivers same benefit at lower cost than Defined Contribution Plans

A new report issued today finds that a defined benefit (DB) pension plan can deliver the same level of retirement income to a group of employees at 46% lower cost than an individual defined contribution (DC) account.

The analysis calculates that DB pension plans:

· Avoid the problem of “over-saving” by pooling the longevity risks of large numbers of individuals – resulting in a 15% cost savings.

· Are ageless and therefore can perpetually maintain an optimally balanced investment portfolio rather than the typical individual strategy of down-shifting over time to a lower risk/return asset allocation – resulting in a 5% cost savings.

· Achieve higher investment returns as compared to individual investors because of professional asset management and lower fees – resulting in a 26% cost savings.

The study, “A Better Bang for the Buck: The Economic Efficiencies of Defined Benefit Pension Plans,” was published by the National Institute on Retirement Security.

“The analysis is somewhat of a myth buster when it comes to conventional wisdom on the cost of retirement plans,” said Beth Almeida, report author and Executive Director of the National Institute on Retirement Security. She added, “The analysis clearly indicates that the qualities inherent in DB plans – particularly, the pooling of risks and assets – fuel their fiscal efficiency.

Importantly, the report provides a new lens for policymakers, employers and employees, who are struggling to ensure adequate retirement income with the fewest dollars possible.”

“Our model makes an ‘apples to apples’ calculation of the actual dollar contributions required for a DB and DC plan to achieve the same target retirement benefit,” said William (Flick) Fornia, report author and Senior Vice President with Aon Consulting. He added, “The efficiencies of DB plans already are well documented. This report, however, is important in terms of quantifying the magnitude of those efficiencies.”

The model was based on a group of 1,000 newly hired 30 year old female teachers who work for three years, take a two year leave to have children, work for a total of 30 years, and then retire at age 62 with a final salary of $50,000. The target annual pension benefit for the model is $26,684, or $2,224 monthly with cost of living adjustments. Together with Social Security benefits, each teacher can expect to receive roughly 83% of her pre-retirement income, which meets the generally accepted standard of retirement income adequacy.

The model calculates that the cost to fund the target retirement benefit under the DB plan is 12.5% of payroll each year, while the cost to provide the same target retirement benefit under the DC plan is 22.9% of payroll each year. In other words, the DB plan can provide the same benefit at a cost that is 46% lower than the DC plan.

In dollar terms, the DB plan needs to have accumulated approximately $355,000 for each participant in the plan by the time they turn 62, while the DC plans must accumulate almost $550,000 per participant . This difference – almost $200,000 per participant – illustrates the large dollar savings that DB plans yield for employers, employees, and taxpayers.

The report also indicates that DC plans are essential to the retirement security equation. DC plans enable workers the save for retirement in a manner that reflects their individual situations. Most retirement experts indicate that retirement security can be achieved with a “three-legged stool” consisting of Social Security, a DB plan, and a supplemental DC savings plan. Workers who have access to all three sources of retirement income are in the best position to achieve a secure retirement.

The full report can be accessed at http://www.nirsonline.org/index.php?option=com_content&task=view&id=121&Itemid=48

LASERS-Did you know?

LASERS is a qualified defined benefit pension retirement plan under section 401(a) of the Internal Revenue Code.

Employees contribute to LASERS at a percentage of their actual earnings. These contributions are tax sheltered until retirement.

LASERS-Did you know?

LASERS is a qualified defined benefit pension retirement plan under section 401(a) of the Internal Revenue Code.

Employees contribute to LASERS at a percentage of their actual earnings. These contributions are tax sheltered until retirement.

Rhode Island Legislator Endorses Plan to Change State’s Public Pension System

House Speaker William J. Murphy has endorsed plans to fundamentally change the public-pension system in Rhode Island, a move that may end the practice of granting guaranteed lifetime retirement benefits to new state employees and public school teachers.

Murphy, among the three most powerful elected officials in state government, first said he preferred a 401k-like system for new employees. Yesterday, he said he would create a special commission in January to study the issue. And he said he expects that commission to produce legislation to change the system before the end of the session.

Murphy acknowledged that public employee and teachers’ unions will fight the change. He said he would include labor representatives on the study commission.

In all, just three states — Alaska, Michigan and West Virginia — and the District of Columbia require state employees or public school teachers to enroll in a defined-contribution plan, according to the national council. Another six states make defined
contribution plans optional.

Money for public-employee pensions comes from two primary sources: the contributions of the employees — teachers contribute 9.5 percent of their salaries and state employees contribute 8.75 percent — and Rhode Island taxpayers. The taxpayers’ portion has increased every year since 1999: from 9.95 percent to 25.03 percent for the teachers’ pensions alone.

Officials say that the state’s unfunded liability is growing for two main reasons: most retirees are living longer, and the fund continues to suffer from the lingering effects of poor stock-market performance several years ago.

GM Proposes Radical Pension Changes

General Motors is pushing for a radical move away from its defined benefit pension plan in negotiations with the United Auto Workers union. New hires would no longer receive traditional pensions but would be set up with individual 401(k)-style retirement plans, say sources close to negotiations.

GM's push toward individual investments instead of a guaranteed monthly check means the biggest U.S. automaker wants to scale back three landmark gains by the UAW in the past half- century: a fixed pension, company-paid health care and an annual cost-of-living raise.

The negotiations give Chief Executive Officer Rick Wagoner a chance to shed tradition and ensure GM's survival before the next contract expires in 2011. Since the current accord was created in 2003, GM has announced plans to shut 12 North American locations and eliminated more than 34,000 workers while losing $12.4 billion over 2005 and 2006.

``They know the old ways don't work -- they're not competitive,'' said Pete Hastings, a fixed-income analyst at Morgan Keegan & Co. in Memphis, Tennessee. ``They modernize their factories, and they have to modernize their pay scale.''

GM also has proposed freezing cost-of- living raises to help pay for a union-run fund that would take responsibility for retiree health care, said the people, who asked not to be identified because they aren't authorized to speak publicly.

Defined Benefit (DB) plan freezes lose momentum

Big businesses have put the kibosh on freezing defined benefit plans according to this story from the Employee Benefit News.

Among Fortune 1,000 firms, DB plan freezes dropped from 7% of companies in 2006 to 4% in 2007. Last year, new freezes showed the highest increase, with 42 additional companies on the list with frozen plans, Watson Wyatt Worldwide, an HR consulting firm, reports.

In addition, among 300 employers with pension plan assets of more than $100 million, nearly 60% said their plans were open to new hires and will remain open.

“Undoubtedly, some companies will freeze their plans in the future, but it appears that trend has peaked,” says Kevin Wagner, a senior retirement consultant at Watson Wyatt. “With less regulatory uncertainty and funding volatility better under control, the environment is now a more positive one for pension plan sponsors.”

Study: Traditional Pensions rapidly disappearing

The Los Angles Times reports nearly two-thirds of employers that offer traditional pensions have closed their plans to new hires or frozen them for all employees.

The latest numbers show a speed-up in the decline of retirement plans in which employers, instead of employees, are responsible for investing retirement money and providing benefits. They also illustrate that the trend is no longer confined to troubled industries such as steel, auto and airlines, but now involves healthy companies such as IBM and Verizon as well.

The survey by the industry-supported Employee Benefit
Research Institute and Mercer Human Resources Consulting shows that most companies that close off their pensions seek to partially offset the loss to employees by increasing contributions to company-sponsored 401(k) s, where employees are responsible for managing their own retirement money.

The new survey found that 25 percent of employers
questioned have closed their pensions to new hires within the past two years while 12.9 percent have frozen their plans for all employees. The survey found that another one-third expect to make similar changes in the coming two years. The survey questioned 162 employers.

The speed-up of pension freezes and closures raises anew the question of whether the Baby Boom generation is financially ready to retire. Some recent studies have suggested that Boomers are not as ill-prepared as previously suggested and that a combination of pensions, 401(k)s and home equity, together with Social Security, will see them through old age. But EBRI analysts suggested these studies may need to be reconsidered.

AFSCME- 'The Truth About Public Employee Retirement Plans'

The American Federation of State, County, and Municipal Employees (AFSCME) has developed a useful fact sheet on Defined Benefit (DB) and Defined Contribution (DC) pension plans.

The Truth About Public Employee Retirement Plans explains numerous ways in which DB plans are superior to 401k-style DC plans, and indentifies the myths that it says lead people to believe otherwise.

For example, the fact sheet tackles the misconception that public DB plans are funded entirely, or even mostly, by taxpayers' dollars:

Q: Aren’t defined benefit pensions
a financial burden to taxpayers?

A: No. Employee contributions and investment
earnings cover the bulk of defined benefit
costs while government contributions only
cover 26 percent of the total costs. The truth is
that the median pension contribution rate of
public employees covered by Social Security is
5 percent of their pay, while the median pension
contribution rate of public employees not
covered by Social Security is 8.6 percent of
their pay. In the private sector on the other
hand, 90 percent of plans don’t require any
employee contribution.

And as AFSCME points out, contrary to popular belief, DC plans are actually more expensive to administer.

Q: Aren’t defined contribution plan
fees and expenses lower than those
of a defined benefit plan?

A: No. For a defined contribution plan, you
have to deal with an average of $1.35 mutual
fund charge for “load” and administrative
expenses on every $100 invested, plus additional
record keeping and participant education
costs. This amounts to an annual cost of
2 percent of your assets. In reality, this is ten
times higher than the cost of administering a
defined benefit plan. So even if defined contribution
plan participants earn the same rate as
defined benefit plan participants, they’d still
receive a smaller benefit! Where does that
extra money go? Wall Street.

Read more here, at AFSCME.org.

Trouble predicted for corporate pension plans

A global consulting firm that monitors the pension industry predicts a troubled future for an overwhelming percentage of private-sector pension plans in the United States.

A new study has reportedly predicted up to 75% of US corporate pension plans could be frozen or terminated within the next five years.

The findings from McKinsey & Company said the return of private defined benefit plans to health fund levels would rapidly boost the number of companies opting to freeze or terminate their plans from the current level of 25%.