Category Archives: Pensions

Does Mortality Differ Between Public and Private Sector Workers?

Source: Alicia H. Munnell, Jean-Pierre Aubry and Geoffrey T. Sanzenbacher, Center for Retirement Research at Boston College (CRR), SLP#44, June 2015

The brief’s key findings are:
– In projecting pension costs, state and local plans assume their workers will live longer than private sector workers. Is this assumption accurate and, if so, why?
– The analysis confirms that public sector workers – particularly women – have lower mortality rates than their private sector counterparts.
– The question is whether lower mortality reflects the nature of the job or the nature of the workers.
– The answer is the workers – specifically their education levels. Controlling for education, the gap between public and private workers disappears.

Pension De-Risking

Source: Paul M. Secunda, Brendan S. Maher, Marquette Law School Legal Studies Paper No. 15-07, March 12, 2015

From the abstract:
The United States is facing a retirement crisis, in significant part because defined benefit pension plans have been replaced by defined contribution retirement plans that, whatever their theoretical merit, have left significant numbers of workers unprepared for retirement. A troubling example of the continuing movement away from defined benefit plans is a new phenomenon euphemistically called “pension de-risking.”

Recent years have been marked by high-profile companies engaging in various actions designed to reduce the company’s exposure to pension funding risk (hence the term “pension de-risking”). Some de-risking strategies convert a federally-guaranteed pension into a more risky private annuity. Other approaches convert the pension into cash for the beneficiary, which may be insufficient to provide lasting retirement income. These strategies have raised many concerns that participants are getting the short end of the stick and that pension de-risking is undermining the statutory purpose of ERISA.

Regulators are only beginning to consider ways to appropriately police pension de-risking behavior. We propose that the government should take an aggressive stance in regulating such conduct. Participants as a class should not be made worse off by a pension de-risking transaction, and the relevant de-risking rules should so reflect. More specifically, regulators should (1) encourage desirable forms of de-risking by establishing regulatory safe harbors; (2) require a battery of procedural safeguards for annuitization transactions; (3) require improved disclosures for cash buyouts; and (4) limit cash buyouts when beneficiaries are not likely to meaningfully understand the potentially adverse consequences of trading a pension for cash.

Staying Afloat in a Sea of Pension Numbers

Source: Dean Michael Mead, Marcia Van Wagner, Donald J. Boyd, Municipal Finance Journal, Vol. 35 no. 4, Winter 2015
(subscription required)

From the abstract:
Recent years have witnessed a spate of new numbers, some of them contradictory, about the funding status of state and local government pension plans. Why do pension plans look better funded according to some numbers and worse according to others? Rather than being more or less accurate than one another, each set of numbers emphasizes different aspects of pension finances with potential value to analysts. This article explains how pension numbers are calculated by financial economists and rating agencies, under the old as well as the new pension accounting standards, and it highlights the valuable insights that can be gleaned from each.

The Smell Test for Bad Data

Source: Katherine Barrett & Richard Greene, Governing, Smart Management, May 7, 2015

There are many ways numbers can be misleading. Here are a few. ….

…. Another lesson: Whenever anyone is comparing annual data from one state to another or one city to another, the information should be based on precisely the same time period. Consider financial reports for pension plans. Fifteen of the states base them on a calendar year, while the rest use the fiscal year to calculate annual investment results. When policymakers compare data from two states, the results can be very misleading. For example, Oregon’s pension investment results for 2008 showed a 27 percent loss, whereas California’s showed only a 4.9 percent drop. But this says little about actual pension performance because the 2008 investment results for Oregon represent the full blow of the devastating stock market drop in the fall, whereas California’s results only took the state through June 30th and the fall losses showed up in its 2009 report. …..

What is the Cost of Transitioning from a DB Plan to a DC Plan?

Source: National Conference on Public Employee Retirement Systems, NCPERS Research Series, April 2015

Will closing your Defined Benefit (DB) plan and moving some or all employees to a Defined Contribution (DC) plan be the promised panacea? If getting the most for each dollar going into the plan makes a difference in your decision making there is much to consider. If partnering with employees to create a secure retirement and to be active economic participants in your community after retirement is important, dig deeper. These outcomes are highly unlikely to occur with a DC plan being the primary retirement arrangement because research demonstrates that DC plans are at least 20% less efficient in delivering retirement benefits. Before making such a monumental change decide for yourself on the costs and merits of transitioning away from a primary DB Plan. This paper examines the cost associated with transitioning from a defined benefit (DB) plan to a defined contribution (DC) plan. It also explores the cost difference of these two plan types in delivering retirement benefits….

Income Inequality: Hidden Economic Cost of Prevailing Approaches to Pension Reforms

Source: National Conference on Public Employee Retirement Systems, May 2015

From the press release:
Reforms that negatively affect pension plan participants and beneficiaries also exacerbate income inequality and hinder economic growth, according to a new study by the National Conference on Public Employee Retirement Systems (NCPERS). The study showed a strong correlation over three decades between the declining number of workers covered by defined benefit pension plans and the growing income gap between rich and poor Americans. Other variables that were associated with increased income inequality included declines in unionization, marginal tax rates, and investment in education, according to the study, “Income Inequality: Hidden Economic Cost of Prevailing Approaches to Pension Reforms.” ….
The study examined national trends in pension changes, income inequality, and economic growth in the 1980s, 1990s, and 2000s, as well as trends in each of the 50 states from 2000 to 2010. Among the findings:
• Fifteen million additional workers would have defined benefit plans if there had not been a trend over the past 30 years to convert pensions into defined contribution plans.
• The correlation between economic growth and income inequality in the United States is negative 0.553. This relationship means that higher the income inequality, the lower is the economic growth.
• A single negative change in public pensions in a state increases income inequality in that state by about 15 percent. ….

Guest Post: Will Governor Rauner’s New Bankruptcy Proposal Break Chicago’s Pension Obligations?

Source: Michelle Wilde Anderson, OnLabor blog, May 1, 2015

Illinois Governor Bruce Rauner has decided that allowing his state’s municipalities to declare bankruptcy is an important arrow in his quiver to break “the corrupt bargain that is crushing taxpayers”—namely union influence and membership rates in Illinois. ….

…. So the recent big city Chapter 9’s eliminated costly health care benefits and deeply discounted capital market creditors’ debts, but nonetheless preserved most of their pension payments. Why they struck that balance is critical for Illinois voters and politicians to understand. Rationales in each city varied, but two main themes emerged.

First, the plan authors in Detroit saw that cutting their retirees’ benefits would sink many retirees below the poverty line in the city and the region. This was a painful humanitarian reality, but so too was it an economic one: a municipal debtor has to be stable enough to pay its obligations under its bankruptcy plan. More concentrated local poverty does not help. A second main argument against cutting pension benefits showed up in Stockton. Officials determined that cutting benefits and thereby being excluded from the state pension system would make the city uncompetitive for public employees, especially police. That was a hard pill to swallow for a city with a spiking homicide rate and no cash to spare on competitive wages. Many other concerns surfaced in both cities as well, but they amounted to a bottom line determination that there were vanishingly few fat cat pensioners to be found, and the municipalities would be even worse off—as a debtor, as a city—if they cut into their retirees’ payments. (Because these big cases and others have effectively settled, the legal fairness of the decision not to cut pension payments has never been tested by a higher court, but there are compelling arguments that these decisions are consistent with Chapter 9.) …..

Falling Short: The Coming Retirement Crisis and What to Do About It

Source: Alicia H. Munnell, Center for Retirement Research at Boston College, IB#15-7, April 2015

The brief’s key findings are:
– Today’s workers face a brewing retirement crisis due to:
* a growing need for income driven by longer lifespans, rising health costs, and low interest rates; and
* reduced support from Social Security and defined benefit pension plans.
– Fortunately, the solutions are at hand:
* Policymakers should shore up Social Security with more revenue, make 401(k)s fully automatic, and ensure everyone has access to a savings plan.
* Individuals should work longer – to age 70 if possible – and consider tapping their home equity in retirement to support day-to-day needs.
– Any delay in responding to the challenge will only make adjustments more painful down the road.