Category Archives: Pensions

State Pension Systems on the Rebound

Source: Jennifer Burnett, Capitol Ideas, Vol. 55 no. 4, July/August 2012

Things are starting to look up for state pension systems…. Economic conditions in general have been improving, especially on Wall Street, which is closely tied to the financial health of public retirement systems. Corporate stocks and bonds make up more than half of all cash and investment holdings for state and local public employee retirement systems.
But the improved health of pensions isn’t just because investment markets are on the rebound; states have taken decisive action that also has helped the ailing systems…. Those reforms include higher employee contributions, a higher age or more years of service to qualify for retirement, and reductions in cost-of-living adjustments, or COLAs, for future or existing public employees….

Retirement Security for Americans and the Role of Defined-Benefit Pension Plans

Source: Thomas P. DiNapoli, Public Administration Review, Vol. 72 no. 4, July/August 2012
(subscription required)

…While I believe that it is appropriate to have a discussion about ways to reduce costs, I believe that a move toward widespread availability of a 401(k)-style plan for public employees is shortsighted. Let’s look at the numbers in perspective: pension contributions from state and local governments nationwide amount to 3.8 percent of their spending, on average. In New York, the number is 2.4 percent of state operating funds. The truth is that most state pension funds are sustainable in the long term. Most of the significant underfunding of state and local plans in recent years has resulted from shortsighted practices of sponsoring governments for budget relief in bad times or spending more in other areas in good times…..

Where Have All the Good Jobs Gone?

Source: John Schmitt and Janelle Jones, Center for Economic and Policy Research, July 2012

From the summary:
The U.S. workforce is substantially older and better-educated than it was at the end of the 1970s. The typical worker in 2010 was seven years older than in 1979. In 2010, over one-third of US workers had a four-year college degree or more, up from just one-fifth in 1979. Given that older and better-educated workers generally receive higher pay and better benefits, we would have expected the share of “good jobs” in the economy to have increased in line with improvements in the quality of workforce. Instead, the share of “good jobs” in the U.S. economy has actually fallen. The estimates in this paper, which control for increases in age and education of the population, suggest that relative to 1979 the economy has lost about one-third (28 to 38 percent) of its capacity to generate good jobs. The data show only minor differences between 2007, before the Great Recession began, and 2010, the low point for the labor market. The deterioration in the economy’s ability to generate good jobs reflects long-run changes in the U.S. economy, not short-run factors related to the recession or recent economic policy….

…The standard explanation for the deterioration in the economy’s ability to create good jobs is that most workers’ skills have not kept up with the rapid pace of technological change. But, if technological change were behind the decline in good jobs, then we would expect that a higher – probably substantially higher – share of workers with a four-year college degree or more would have good jobs today. Instead, at every age level, workers with four years or more of college are actually less likely to have a good job now than three decades ago. This development is even more surprising because the economy also has almost twice as many workers with advanced degrees today as it did in 1979.

We believe, instead, that the decline in the economy’s ability to create good jobs is related to a deterioration in the bargaining power of workers, especially those at the middle and the bottom of the income scale….
See also:
A Closer Look at Good Jobs By Education Level
Source: John Schmitt, Center for Economic and Policy Research, CEPR blog, August 8, 2012
Does This Job Come With a Retirement Plan?
Source: Janelle Jones, Center for Economic and Policy Research, CEPR blog, August 2, 2012

The Pension Factor 2012: The Role of Pensions in Reducing Elder Economic Hardships

Source: Frank Porell and Diane Oakley, National Institute on Retirement Security, July 2012

From the summary:
A new study calculates the impact of pensions for reducing the risk of elder American poverty and hardship, particularly for households headed by women and racial/ethnic minority groups.

The study finds that rates of poverty among older households lacking defined benefit (DB) pension income were approximately nine times greater than the rates among older households with DB pension income in 2010, up from six times greater in 2006 a new study calculates. Older households with lifetime pension income are far less likely to experience food, shelter, and health care hardship, and less reliant on public assistance. The data also indicate that pensions are a factor in preventing middle class Americans from slipping into poverty during retirement.

The report estimates that in 2010, DB pension receipt among older American households was associated with:

– 4.7 million fewer poor and near-poor households
– 460,000 fewer households that experienced a food insecurity hardship
– 500,000 fewer households that experienced a shelter
– 510,000 fewer households that experienced a health care
– 1.22 million fewer households receiving means-tested public assistance

See also:
Press Release
Fact Sheet
Webinar Replay

Pension Fund Asset Allocation and Liability Discount Rates: Camouflage and Reckless Risk Taking by U.S. Public Plans?

Source: Aleksandar Andonov & Rob Bauer: Maastricht University, Martijn Cremers: University of Notre Dame, May 1, 2012

From the abstract:
We use an international pension fund database to compare the asset allocation and liability discount rates of public and non-public funds in the U.S., Canada and Europe. We document that U.S. public funds exploit the opaque incentives provided by their distinct regulatory environment and behave very differently from U.S. corporate funds and both public and non-public pension funds in Canada and Europe. In the past two decades, U.S. public funds uniquely increased their allocation to riskier investment strategies in order to maintain high discount rates and present lower liabilities, especially if their proportion of retired members increased more. In line with economic theory, all other groups of pension funds reduced their allocation to risky assets as they mature, and lowered discount rates as riskless interest rates declined. The arguably camouflaging and risky behavior of U.S. public pension plans seems driven by the conflict of interest between current and future stakeholders, and could result in significant costs to future workers and taxpayers.

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….