Category Archives: Pensions

Pension Reform: Helping States Attract the Best Workers?

Source: Urban Institute, July 2012

Young workers may need to rethink starting jobs in state government; they could end up paying for unfunded pension liabilities without much to show for their efforts. State pensions provide little incentive for new graduates, lock in middle-aged workers, and push seasoned workers into premature retirement.

Papers include:
Are Pension Reforms Helping States Attract and Retain the Best Workers?
Source: Richard W. Johnson, C. Eugene Steuerle, Caleb Quakenbush, Urban Institute, Program on Retirement Policy, Occasional Paper Number 10, July 2012

Recent budget pressures have led many states to cut future pension benefits for state workers. Using New Jersey as a case study, this report describes how these reforms ignore larger employee recruitment and retention issues for today’s more mobile workforce. State retirement plans generally do not attract younger workers, lock in middle-aged workers even if a job is not a good fit, and push older workers into retirement. Recent reforms also shift pension financing burdens to the young, largely sparing taxpayers and current older workers and retirees.

How Pension Reforms Neglect States’ Recruitment and Retention Goals
Source: Richard W. Johnson, C. Eugene Steuerle, Caleb Quakenbush, Urban Institute, Program on Retirement Policy, Older Americans’ Economic Security, no. 31, July 2012

To control rising pension costs, many states are reducing the generosity of the retirement plans they offer their employees, partly by increasing required employee contributions. These reforms, however, ignore the employee recruitment and retention problems created by traditional pension plans. Using New Jersey as a case study, this brief shows how state retirement plans discourage younger workers from joining the state’s workforce, lock in middle-aged workers even if a job is not a good fit, and push older workers into retirement. Recent reforms make these plans even less appealing to a modern, mobile workforce.

State Pension Reforms: Are New Workers Paying for Past Mistakes?

Source: Richard W. Johnson, C. Eugene Steuerle, Caleb Quakenbush, Urban Institute, Program on Retirement Policy, Older Americans’ Economic Security, no. 32, July 2012

When state pension plans are underfunded, someone eventually has to pay for the shortfall. Many recent reforms designed to improve plan finances shift burdens to the young, particularly by making many new employees net contributors to–rather than beneficiaries of–these plans. Using New Jersey as a case study, this brief shows how states require higher levels of employee contributions, invest them in somewhat risky assets, and then, like a bank or financial intermediary, pay back many employees less in benefits than what they contributed and expected to earn on those contributions.

Recognizing and Responding to Retirement Obligations: Other Postemployment Benefits in Florida Cities and Counties

Source: David S. T. Matkin and Alex Y. Krivosheyev, American Review of Public Administration, published online: June 26, 2012
(subscription required)

From the abstract:
With the implementation of recent accounting standards (GASB 43 and 45), local governments began reporting their liabilities and funding levels for postemployment benefits other than pensions—so-called OPEBs. In this article we pose three questions: (a) What factors affect the size of a government’s OPEB liability? (b) How did the OPEB standards affect the way governments manage their OPEB plans? and (c) What factors explain government responds to the OPEB standards? We draw data directly from audited financial reports in Florida counties and cities to examine those questions. Our results suggest that benefit policies, personnel characteristics, and actuarial cost methods are the most influential factors in determining a size of a government’s OPEB liability. Our results also provide evidence that many governments responded to the OPEB standards by reducing their benefits and changing their funding approaches. We show preliminary evidence of differences in governments that changed their policies or funding approaches with those that continued the status quo.

The Very Public Private-Sector Retirement Problem

Source: Penelope Lemov, Governing, June 28, 2012

The Great Recession was hard on private workers. Will states and localities have to rescue them?…

The 2008 financial meltdown and its continuing aftermath have not been kind to retirement accounts in the private sector. Those with 401(k) plans saw a chunk of their savings slip away, and that lack of pension coverage is set to become a huge state and local headache…. Today, 58 percent of private-sector workers have no pension savings at all…. Meanwhile, when current workers ages 50 to 64 reach 65, over 48 percent of them will be poor or near-poor… Not surprisingly then, it’s California that’s trying to address the issue. The Legislature is debating a bill that’s a rehash of a pre-2008 proposal — one that suggested accounts for employees in the private sector be setup and run by the California Public Employees’ Retirement System (CalPERS) to take advantage of the pension plan’s investment expertise and leverage in financial markets. CalPERS is no longer flying as high as a decade ago, so the new version of the bill doesn’t link the new plan to the pension fund behemoth.

Rather, the latest iteration proposes that businesses in the private sector that are unable to set up 401(k) plans for their workers — mostly small businesses — give their employees access to a retirement savings plan through a trust fund set up by the state. The state would establish a board to oversee the fund, and employees could contribute a portion of their earnings to an account in their name. Employers could administrate it through a payroll deposit or some other hassle-free mechanism. When the employee retires, their savings account would be converted to a lifetime annuity.

OECD Pensions Outlook 2012

Source: Organisation for Economic Co-operation and Development (OECD), 2012
(subscription required)

From the summary:
It may not feel like it, but today’s retirees are living through what might prove to have been a golden age for pensions and pensioners. Far fewer older people live in poverty than in the past: about a quarter fewer than in the mid-1980s. They also can expect to live longer.

Today’s and tomorrow’s workers, in contrast, will have to work longer before retiring and have smaller public pensions. Their private pensions are much more likely to be of the defined-contribution type, meaning that individuals are more directly exposed to investment risk and themselves bear the pension cost of living longer.

This edition of the OECD Pensions Outlook examines the changing pensions landscape. It looks at pension reform during the crisis and beyond, the design of automatic adjustment mechanisms, reversals of systemic pension reforms in Central and Eastern Europe, coverage of private pension systems and guarantees in defined contribution pension systems. It closes with a policy roadmap for defined contribution pensions and a statistical annex.
See also:
Press release

Five things to consider before cutting pension benefits

Source: Mark Miller, Reuters, June 20, 2012

The message from voters about public pension plans is clear: They’re ready to cut the retirement benefits of police, firefighters, teachers and other state and municipal workers….

…Pensions are, no doubt, consuming a larger share of some state and local budgets. The bill has come due for years when plan sponsors did not make their full plan contributions; in the years leading up to the 2008 financial crisis, many papered that over by relying on strong stock market returns. Many plans also took major hits in the 2008 crash, and returns have since been hurt by low interest rates.

But – before we continue swinging the axe – here are five things to keep in mind about public sector pensions:
1. Pensions aren’t simply a gift from taxpayers…
2. Many workers don’t get Social Security…
3. Pension underfunding isn’t as bad as you think…
4. Pensions are more efficient than 401(k)s…
5. The retirement crisis is real….

America's Looming Pension Shock

Source: Mark Funkhouser, Governing, June 14, 2012

The poverty rate for people over age 65 dropped dramatically over the last several decades. Today it is the lowest of any age group, at about 9 percent. The aged vote, and so they drove the creation of a system of programs that lifted them out of poverty. That system has virtually disintegrated, but we have not yet felt the shock. We will….

And while many public-sector workers are seeing their pensions being cut back dramatically, about half of private-sector workers have no pension at all. Tens of thousands of older workers are taking Social Security early — foregoing a substantial portion of their maximum benefit — because they’ve lost their jobs and cannot find employment.

The net result of all this is a looming crisis for state and local governments, both because of the declines in tax revenue resulting from lower incomes as well as the fact that poor people put far more demands on government services than the non-poor. In addition, the creation of a vast new class of formerly middle-class, now poor, elderly will bring with it significant political and social instability.

Pension Benefit Guaranty Corporation (PBGC): A Fact Sheet

Source: John J. Topoleski, Congressional Research Service, 95-118, April 16, 2012

The Pension Benefit Guaranty Corporation (PBGC) is a federal government agency established in 1974 by the Employee Retirement Income Security Act (ERISA; P.L. 93-406). It was created to protect the pensions of participants and beneficiaries covered by private sector, defined benefit (DB) plans. These pension plans provide a specified monthly benefit at retirement, usually either a percentage of salary or a flat dollar amount multiplied by years of service. Defined contribution plans, such as §401(k) plans, are not insured. The PBGC is chaired by the Secretary of Labor, with the Secretaries of the Treasury and Commerce serving as board members.

The PBGC runs two distinct insurance programs for single-employer and multiemployer plans. Multiemployer plans are collectively bargained plans to which more than one company makes contributions. PBGC maintains separate reserve funds for each program. In FY2011, the PBGC insured about 27,066 DB pension plans covering 44.2 million people. The PBGC paid or owed benefits to 1.5 million people and took in 152 newly terminated pension plans. A firm must be in financial distress to end an underfunded plan. Most workers in single-employer plans taken over by PBGC receive the full benefit earned at the time of termination, but the ceiling on multiemployer plan benefits that could be guaranteed has left almost all of these retirees without full benefit protection.

State and Local Public Retirement Systems

Source: Jennifer Burnett, Council of State Governments, Capitol Facts and Figures, May 2012

From the summary:
In recent years, state policymakers have been bombarded with warnings about the sustainability of their public pension systems. A Pew Center on the States 2010 report warned that there was a $1 trillion gap between what states had set aside for pensions and the real price tag for those benefits. But after years of bad news, things are starting to look up. 2010 was the first year that public pension systems have shown positive earnings since 2007, just before financial markets – and public pension assets – took a dive. Those retirement systems saw a $722.2 billion loss in 2009 and a $178.8 billion loss in 2008.
See also:
Table: State and Local Public Employee Retirement Systems

NCPERS 2012 Public Fund Study

Source: National Conference on Public Employee Retirement Systems and Cobalt Community Research, 2012

In April and May 2012, the National Conference on Public Employee Retirement Systems (NCPERS) undertook the most comprehensive study to date addressing retirement issues for this segment of the public sector. In partnership with Cobalt Community Research, NCPERS has collected and analyzed the most current data available on member funds’ fiscal condition funds and steps they are taking to ensure fiscal and operational integrity.

The 2012 NCPERS Public Fund Study includes responses from 147 state and local government pension funds with a total number of active and retired memberships surpassing 7.5 million and assets exceeding 1.2 trillion. The majority – percent – were local pension funds, while 16 percent were state pension funds.

The study finds that public funds continue to respond to changes in the economic, political and social landscape by adopting substantial organizational and operational changes to ensure long‐term sustainability for their stakeholders. Efforts include increasing age and service requirements, increasing member contributions, stronger operational practices and more diligent oversight.