Category Archives: Pensions

Lobbying Behavior of Governmental Entities: Evidence from Public Pension Accounting Rules

Source: Abigail M. Allen, Reining Petacchi, Harvard Business School Accounting & Management Unit Working Paper No. 15-043, November 30, 2014

From the abstract:
We examine the lobbying behavior of state governments in the development of recently issued public pension accounting standards GASB 67 and 68. Consistent with opportunistic motivations, we find that states’ opposition to the liability increasing provisions embedded in these standards is increasing in the severity of pension plan underfunding, state budget deficits, and the use of high discount rates. Further we find opposing states are subject to more stringent balanced budget requirements and greater political pressure from unions. By contrast, we find evidence that the support from financial statement users for these provisions is amplified in states with poorly funded plans and large budget deficits, suggesting government lobbying is misaligned with a public interest perspective. We also find evidence that user support varies by type: internal users (public employees) overwhelmingly oppose the standards, relative to external users (credit analysts and the broader citizenry) but the difference is moderated in states with constitutionally protected benefits. This finding is consistent with the expectation that pension accounting reform will motivate cuts in pension benefits as opposed to increased levels of funding from the governments. Analyses of 2011 and 2012 state pension reforms confirm that states opposed to accounting reform are more likely to cut pension benefits.

Building Bulwarks Against the Breakdown of Retirement Benefits for Public Sector Employees

Source: Amanda Cuda, HR News, Vol. 80 no. 11, November 2014
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….Recognizing that cutting subsidies and payments cannot stand as the only way to address pension problems without risking employees’ financial security, some public sector organizations are looking at innovative ways to lessen their spending….

Still a Better Bank for the Buck: Update on the Economic Efficiencies of Pensions

Source: William B. Fornia, Nari Rhee, National Institute on Retirement Security, December 2014

From the summary:
New research finds that pension plans are a far more cost-efficient means of providing retirement income as compared to individual defined contribution accounts.

The study calculates that the economic efficiencies embedded in defined benefit (DB) pensions enable these retirement plans to deliver the same retirement income at a 48% lower cost than 401(k)-type defined contribution (DC) accounts.

The new analysis finds that there are three unique drivers of the cost savings. More specifically, DB pensions:
– Pool the longevity risks of large numbers of individuals to provide Americans with stable income that won’t run out in retirement. Said another way, pensions only have to save for the average life expectancy of a group of individuals. Absent a group retirement plan, individuals must save enough on their own should they be among the half of retirees who will live longer than the average life expectancy. This DB pension longevity risk pooling feature generates a 10% cost savings.
– Are “ageless” and therefore can perpetually maintain an optimally balanced investment portfolio. In contrast, a typical individual investor must down shift investments over time to a lower risk portfolio of cash and bonds, sacrificing higher investment returns generated from stocks. This DB pension balanced portfolio feature generates an 11% cost savings.
– Achieve higher investment returns as compared to individual investors because they have lower fees and are managed by investment professionals. This lower fees and higher returns DB pension feature generates a 27% cost savings.

A Green Bond for Public Pensions

Source: Penelope Lemov, Governing, November 13, 2014

Pension plans want to support environmental projects, but there is one thing holding them back…. Girard Miller, chief investment officer of the Orange County Employees Retirement System (OCERS) noted that many pension plans are interested in investments that can boost funding for new infrastructure, especially when those projects are environmentally friendly. The problem, Miller said, is that pension investment officials “don’t want tax-exempt paper in their portfolios.”

Why? Since pension plans are already tax exempt, they can’t claim the tax exemption. That leaves, he says, “a mismatch between available pension capital and the public sector’s infrastructure financing needs, especially for projects that lack a revenue source.”

Is there a fix? Miller talked about one in a recent interview, which has been edited for clarity and length….

Urban Fiscal Stability and Public Pensions: Sustainability Going Forward

Source: University of Pennsylvania, Institute for Urban Research, November 11, 2014

On Nov. 11, Penn IUR hosted a dynamic discussion with leading practitioners and researchers on the complex fiscal issues facing cities, focusing on the legacy issues of the funding of pensions, and looking forward to strategies that support financial sustainability.

Speakers included Robert Inman, Richard King Mellon Professor of Finance, Professor of Business Economics & Public Policy, Professor of Real Estate, The Wharton School, University of Pennsylvania; Mathew McCubbins, Professor of Law and Political Science, Duke Law; Amy Monahan, Julius E. Davis Professor of Law, University of Minnesota Law School; Joshua Rauh, Professor of Finance, Stanford Graduate School of Business and Senior Fellow, Hoover Institution, Stanford University; Richard Ravitch, former Lieutenant Governor of New York; and James Spiotto, Managing Director, Chapman Strategic Advisors LLC; and Marcia Van Wagner, Vice President/Senior Credit Office, States Team, Moody’s Investors Service. Panels will be moderated by Olivia Mitchell, Professor of Business Economics and Public Policy and Executive Director of the Pension Research Council, The Wharton School; and Robin Prunty, Managing Director, Standard & Poor’s Public Finance Ratings. This event was co-sponsored by Next City and made possible with support from Melanie and Lawrence C. Nussdorf. …

Urban Fiscal Stability and Public Pensions: Sustainability Going Forward (Part 1)

Urban Fiscal Stability and Public Pensions: Sustainability Going Forward (Part 2)

Retirement Benefit Decisions by City and County Governments

Source: Robert L. Clark, Melinda Sandler Morrill, Matthew Anderson, and Aditi Pathak, Center for State and Local Government Excellence, Issue Brief, November 2014

From the summary:
This brief is the second of a three-part series that analyzes employee participation in primary and supplemental retirement plans, retiree health care benefits, and Social Security in 20 large cities and counties across the country.

· Workers who work a full career in their city or county can expect a retirement income of between 45 and 80 percent of their pre-retirement income.
· Career employees of local governments who participate in Social Security can expect retirement income replacement rates of 20 to 30 percentage points higher than employees whose governments do not participate in Social Security.
· These and other variations mean that many local workers will need to be disciplined about participating in savings plans, outside of their primary plans, to meet their retirement security goals.

The Great Recession, Decline and Rebound in Household Wealth for the Near Retirement Population

Source: Alan L. Gustman, Thomas L. Steinmeier, Nahid Tabatabai, National Bureau of Economic Research (NBER), NBER Working Paper No. w20584, October 2014
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From the abstract:
This paper uses data from the Health and Retirement Study to examine the effects of the Great Recession on the wealth held by the near retirement age population from 2006 to 2012. For the Early Boomer cohort (ages 51 to 56 in 2004), real wealth in 2012 remained 3.6 percent below its 2006 value. This is a modest decline considering the fall in asset values during the Great Recession.Much of the decline in wealth over the 2006 to 2010 period was cushioned by wealth originating from Social Security and defined benefit pensions. For the most part, these are stable sums that ensured a major fraction of total wealth did not decline as a result of the recession. The rebound in asset values observed between 2010 and 2012 mitigated, but did not erase, the asset losses experienced in the first years of the Great Recession. Effects of the Great Recession varied with the household’s initial wealth. Those who were in the highest wealth deciles typically had a larger share of their assets subject to the influence of declining markets, and were hurt most severely. Unlike those falling in lower wealth deciles, they have yet to regain all the wealth they lost during the recession. Recovering losses in assets is only part of the story. The assets held by members of the cohort nearing retirement at the onset of the recession would normally have grown over ensuing years. Members of older HRS cohorts accumulated assets rapidly in the years just before retirement. Those on the cusp of retiring at the onset of the recession would be much better off had they had enjoyed similar growth in assets as experienced by members of older cohorts. The bottom line is that the losses in assets imposed by the Great Recession were relatively modest. The recovery has helped. But much of the remaining penalty due to the Great Recession is in the failure of assets to grow beyond their initial levels.

Do Public Pensions Help Recruit and Retain High-Quality Workers

Source: Alicia H. Munnell, Jean-Pierre Aubry and Geoffrey T. Sanzenbacher, Center for Retirement Research at Boston College, SLP#41, October 2014

The brief’s key findings are:
– Research shows that pensions help recruit and retain high-quality workers; thus, cutbacks in public pensions could hurt worker quality.
– One indicator of quality is the wage that a worker can earn in the private sector.
– Using this measure, states and localities consistently have a “quality gap” – the workers they lose have a higher private sector wage than those they gain.
– The analysis shows that jurisdictions with relatively generous pensions have smaller quality gaps, meaning they can better maintain a high-quality workforce.
– The bottom line is that states and localities should be cautious about scaling pensions back too far.

Multiemployer Plans – A Proposal to Spread the Pain

Source: Alicia H. Munnell, Jean-Pierre Aubry, Wenliang Hou and Anthony Webb, Center for Retirement Research at Boston College, IB#14-17, October 2014

The brief’s key findings are:
A small, but significant, number of multiemployer pension plans face insolvency in the next 20 years – despite actions to reduce benefits and raise contributions.
To avoid insolvency, a Commission with representatives from plans, employers, and unions has proposed allowing plans to cut accrued benefits of current workers and retirees.
Critics are concerned that such a tool is unnecessary and would unfairly hurt plan participants, particularly retirees.
Our analysis of one large plan suggests that the proposal would improve overall participant welfare, but leave the plan operating largely on a pay-as-you-go basis.
Thus, before approving the use of such a tool, regulators should have access to detailed plan data to ensure not only solvency, but also a reasonable level of funding.