More Public Pension Woes—Constructive Suggestions Wanted

[Bimmerbill]

I won't have the required 30 years of service at age 56 to avoid early retirement penalty. So, under FERS you can still retire with no penalty if you work 30 years and have reached your minimum retirement age (56 in my case).

Some of my coworkers are retiring under CSRS now. Man, I wish I had that!

[Culture]

It seems to me that the obvious solution to pensions is the create a "defined contribution pension." This pension would have the following characteristics.

1) All contributions are held in a separate account in your name.
2) The money is invested by investment professionals. You have no input.
3) When you want to retire, your pension is the actuarially sound life annuity based on your current balance, including a capped COLA.

The way I would solve the current pension mess is to equitably distribute current pension plan assets among the various participants in the current plan, placing the assets into the new "defined contribution pension plan" (deciding on the split would require the wisdom of Solomon).

This plan would eliminate the whole problem of "underfunded" pensions (by definition they are always fully funded), eliminate taxpayers whining about pension cost (you see the actual cost right there in the salary of the public employees), eliminate spiking, eliminate shifting of cost to the unborn and avoid politicians buying vote with pension promises.

I understand that this is unlikely to happen with current pensions, and would have severe negative effects on those holding underfunded pensions. I would like to see this for all future public pensions.

[HsiaoChu]

Quote:

Originally Posted by Culture It seems to me that the obvious solution to pensions is the create a "defined contribution pension." This pension would have the following characteristics. 1) All contributions are held in a separate account in your name. 2) The money is invested by investment professionals. You have no input. 3) When you want to retire, your pension is the actuarially sound life annuity based on your current balance, including a capped COLA. The way I would solve the current pension mess is to equitably distribute current pension plan assets among the various participants in the current plan, placing the assets into the new "defined contribution pension plan" (deciding on the split would require the wisdom of Solomon). This plan would eliminate the whole problem of "underfunded" pensions (by definition they are always fully funded), eliminate taxpayers whining about pension cost (you see the actual cost right there in the salary of the public employees), eliminate spiking, eliminate shifting of cost to the unborn and avoid politicians buying vote with pension promises. I understand that this is unlikely to happen with current pensions, and would have severe negative effects on those holding underfunded pensions. I would like to see this for all future public pensions.

What your suggesting for those in the current plans is probably illegal. Its what corporations do who have no legal oversight about their pension plans and simply do what they want with money. At least IN PA that won't happen because the pension funds and the legally binding agreement between vested members and the fund system(repeated tried to be broken in court and failed to be broken) is stable. But for the future, I see no choice in the matter.

As to having "investment professionals" dealing with my money that I have no control of, I doubt that that would hold up in court. Its "investment professionals" that got us into this mess in the first place. There is no way I want to be putting money into a defined contribution program that I have no control over. Maybe some people would, but not me, and I'd engender a class action suit on that right away.

Z

[Texas Proud]

Quote:

Originally Posted by Zarathu What your suggesting for those in the current plans is probably illegal. Its what corporations do who have no legal oversight about their pension plans and simply do what they want with money. At least IN PA that won't happen because the pension funds and the legally binding agreement between vested members and the fund system(repeated tried to be broken in court and failed to be broken) is stable. But for the future, I see no choice in the matter. As to having "investment professionals" dealing with my money that I have no control of, I doubt that that would hold up in court. Its "investment professionals" that got us into this mess in the first place. There is no way I want to be putting money into a defined contribution program that I have no control over. Maybe some people would, but not me, and I'd engender a class action suit on that right away. Z

Just want to make one comment on the last paragraph... and it does not affect your situation, because yours is different...

My old megacorp had a defined contribution plan... they put 100% of the money into that plan.. it was not professionally managed since they only gave an interest on your balance each year... it was based (IIRC) on the 10 year treasury rate plus 1%... Since I did not contribute to the fund, it would be hard for me to say I must have control over it.... so, make it where all contributions are from the 'entity'... and none from the employee..

One of the ideas that I have not heard is that all public employees go onto SS... why not get everybody on that system... we all know why not... the one you got is a lot better than SS... and it does not cost you any more money... (well, I am assuming here... it did not in Texas)...

[ziggy29]

Quote:

Originally Posted by Texas Proud it was based (IIRC) on the 10 year treasury rate plus 1%...

Wow -- if there was no fluctuation of principal, that sounds like an even better deal than the G fund...

[HsiaoChu]

Quote:

Originally Posted by Texas Proud One of the ideas that I have not heard is that all public employees go onto SS... why not get everybody on that system... we all know why not... the one you got is a lot better than SS... and it does not cost you any more money... (well, I am assuming here... it did not in Texas)...

Well actually, I have paid into social security for almost 155 quarters, too. Some public plans deny their members from having SS taken out of their paychecks. Beyond me why. But I paid into the ss system out of paychecks with two employers since 1971.

Z

[Westernskies]

Five easy steps to solvency:

1. Declare Bankruptcy to allow restructuring
2. Void Union contracts and discharge debt...
3. Offload outstanding pension liabilities to PBGC
4. Rehire on basis of merit. Staff can be reduced to reflect increased productivity/employee.
5. Offer new employees a 401K plan, 100% vested. Employer match based on productivity against measurable goals.

[clifp]

The bottom line is the total employee and employer contribution needs to be significantly higher AND people need to work for 40 years not 30 or 35 in order to pay for 60-90% of your final salary.

I posted this table on a previous thread. The number is the amount of saving expressed as multiple of your final salary. So for instance if your final salary was $50000 and you earned a 5% real (or ~8% nominal) return you have 8x your salary or $400,000 saved up after 30 years or $63500 after 40 years.

Real Return

Years 4% 5% 6%

30 6.7 8.0 13.0

40 10.0 12.7 16.2

If we turn that 400K into a pension for a 52 year old it is just over $14.600 <30% of the base salary. After 40 years a 62 year old with $635K could get an annuity that would worth $31,300 or 62% of your base salary. You can see the penalty for early retirement is ~5% a year. Now note 400K is more than virtually all of the pension funds (except cop/firefighter) have saved up for their average retiree.

In order to achieve this level of saving a private sector worker would have to contribute the max to his 401K 12.5% and receive a 4% employer match, this makes a 16.5% combined employee employer contribution. (I also assumed 2% real merit increase a year) Note 16.5% combined contribution is higher than almost all pension plans I've seen other than a few cop/firefighter pensions.

A prudent public sector employee plan would be 1.5%*years of service, based on the average salary over the last 5 years. The base retirement age would be 65 and retiring early would reduce payments by about 5% per year below the expected 65 year retirement. I'd also give the pension fund the flexibility to provide a 10% bonus payments if investment returns are good.

Alternatively we can keep the existing system but make workers contribute 12.5% of their gross income and cities and states to match it. What is financially impossible is the current benefits based on current contribution levels.

[HsiaoChu]

Quote:

Originally Posted by Westernskies Five easy steps to solvency: 1. Declare Bankruptcy to allow restructuring 2. Void Union contracts and discharge debt... 3. Offload outstanding pension liabilities to PBGC 4. Rehire on basis of merit. Staff can be reduced to reflect increased productivity/employee. 5. Offer new employees a 401K plan, 100% vested. Employer match based on productivity measurements against measurable goals.

Solvency in what? This might work for a private corporation. Public institutions don't have these options.

In regards to teacher pensions: States and school districts, with the power to tax, don't declare bankruptcy.

Public system union contracts are exactly that: legal contracts. You cannot just unilaterally void a legal contract. That would immediately send the whole thing into a court case which you would lose.

In public systems there is no off-loading pension benefits anywhere, they are required to be handled by the fund structure. There is no one to give them to, especially when the law states that if the fund goes dry, the existing working members cannot pay the benefits out of their contributions(ponzi though that is), that the state must pick up the balance.

There is no measure of productivity in a teaching district due to the fact that the children must be taught. Free and appropriate public education is the LAW. And teachers cannot be fired without cause, again, the law.

Finally, offering new employees a 401K is clearly the direction things will go, as defined benefit plans for new employees will disappear.

Z

[HsiaoChu]

Quote:

Originally Posted by clifp The bottom line is the total employee and employer contribution needs to be significantly higher AND people need to work for 40 years not 30 or 35 in order to pay for 60-90% of your final salary.

That works for me, since I'm retiring with 40 years in. Seems realistic to me. In PA, I believe that both the first two options are inevitable and should be that way.

Also it should be mandated by law that neither the employer nor the state can deviate from a certain set percentage of input into the system, and not just because it was a good financial year, unless the fund is at 110% fully funded.

[Leonidas]

Quote:

Originally Posted by Zarathu Solvency in what? This might work for a private corporation. Public institutions don't have these options. In regards to teacher pensions: States and school districts, with the power to tax, don't declare bankruptcy. Public system union contracts are exactly that: legal contracts. You cannot just unilaterally void a legal contract. That would immediately send the whole thing into a court case which you would lose.

You might want to read up on the City of Vallejo Bankruptcy ruling from last year.

Quote:

U.S. Bankruptcy Judge Michael McManus held on March 13 that when Congress enacted 11 U.S.C. 1113 to limit companies from outright rejection of union contracts, it limited the statute to Chapter 11 bankruptcies. By failing to extend the statute's limits to Chapter 9, which covers municipal bankruptcy, McManus said that cities have broader latitude to break existing union pacts. In re City of Vallejo, No. 08-26813-A-9 (E.D. Calif.).

According to the US Bankruptcy Courts website, Chapter 9 is available to school districts as well.

Quote:

Only a "municipality" may file for relief under chapter 9. 11 U.S.C. § 109(c). The term "municipality" is defined in the Bankruptcy Code as a "political subdivision or public agency or instrumentality of a State." 11 U.S.C. § 101(40). The definition is broad enough to include cities, counties, townships, school districts, and public improvement districts. It also includes revenue-producing bodies that provide services which are paid for by users rather than by general taxes, such as bridge authorities, highway authorities, and gas authorities.

Emphasis added.

[Westernskies]

Quote:

Originally Posted by Zarathu Solvency in what? This might work for a private corporation. Public institutions don't have these options. In regards to teacher pensions: States and school districts, with the power to tax, don't declare bankruptcy. Public system union contracts are exactly that: legal contracts. You cannot just unilaterally void a legal contract. That would immediately send the whole thing into a court case which you would lose. In public systems there is no off-loading pension benefits anywhere, they are required to be handled by the fund structure. There is no one to give them to, especially when the law states that if the fund goes dry, the existing working members cannot pay the benefits out of their contributions(ponzi though that is), that the state must pick up the balance. There is no measure of productivity in a teaching district due to the fact that the children must be taught. Free and appropriate public education is the LAW. And teachers cannot be fired without cause, again, the law.Z

Agree 100%- all good reasons why the current public pension system is doomed to failure. None of these reasons address performance, accountability, or operating efficiency, just maintaining the status quo for public service employees. I realize we're talking about a government entity, but the numbers are the same- it is a failed business model. How can you expect a pension system to succeed with no financial accountability (what steps were taken to abate this situation?) , insufficient contributions, (employee and employer) insufficient reserves (often brought on by market-speculative private-sector investments) inability to match headcounts to revenues (no employee left behind) , lack of performance monitoring (teachers can't be fired) , poor oversight (how did we suddenly get in this mess?) , etc. Too many promises were (and are being) made that can't be kept when expenditures exceed revenues. Sure, it's the law, but what happens when the money eventually runs out?- and it will.

Another backlash over this is from those relying on private-sector pensions or 401K plans. Many of these plans were especially hard-hit by this latest economic downturn, and folks whose portfolios have dropped 30%-50% are now expected to pay higher taxes to fund public pensions at 100%?

It's going to be interesting...

[HsiaoChu]

Quote:

Originally Posted by Westernskies Agree 100%- all good reasons why the current public pension system is doomed to failure. None of these reasons address performance, accountability, or operating efficiency, just maintaining the status quo for public service employees. I realize we're talking about a government entity, but the numbers are the same- it is a failed business model.

I would be interested in knowing how you would apply a business model to the business of teaching.

If you are simply talking about a business model applied to pensions, I can't agree more. But mixing up that and such a model for teaching is confusing. I have seen over 40 years hard business models applied to teaching without effect. There are many reasons, one of which are that no business is required to produce a 100% super product with no quality control of the basic manufacturing components.

How would you measure performance, accountability, and operating efficiency in regards to educating children? Children are not widgets to be manipulated; they are real thinking caring breathing feeling human beings. This is something that No Child left behind has left behind.

Z

[Westernskies]

Quote:

Originally Posted by Zarathu I would be interested in knowing how you would apply a business model to the business of teaching. If you are simply talking about a business model applied to pensions, I can't agree more. But mixing up that and such a model for teaching is confusing. I have seen over 40 years hard business models applied to teaching without effect. There are many reasons, one of which are that no business is required to produce a 100% super product with no quality control of the basic manufacturing components. How would you measure performance, accountability, and operating efficiency in regards to educating children? Children are not widgets to be manipulated; they are real thinking caring breathing feeling human beings. This is something that No Child left behind has left behind. Z

1. Dump the NEA-which does more to protect teachers than it does to promote educational excellence. Quit talking and implement real reforms. Stop dumbing down the curriculum so everyone gets a trophy. Eliminate tax credits for private schools, parochial schools, and charter schools- if you don't want to send your kid to your local school, pay for their education yourself. Parents need more skin in the game before anything is going to change at the local level.

2. Recognize that there are some kids who would be better off getting their GED in prison an alternative setting than earning a diploma in the classroom. Implement quality control- Clear them out of classrooms so those who want to learn can learn.

3. ...Performance- % of graduates, at a minimum standard.
......Accountability- some teachers need to fail along with their students.
......Efficiency- cost/pupil graduated.

Nothing personal; I know you are passionate about your career and believe that you were probably a great teacher. I agree that kids are not widgets to be manipulated, but neither is the taxpayer footing the bill for our failing educational system.

[ERD50]

Quote:

Originally Posted by Zarathu There is no measure of productivity in a teaching district due to the fact that the children must be taught.

Really? I mean, really?

So a teacher with a masters degree who draws on years of experience could be replaced with a..... hmmm, stapler? And no one could measure the difference?

I've heard this same statement from other teachers. But get them together with a few glasses of wine, and they all will tell you who the good teachers are and who the bad teachers are. I wonder how they can know, since it is supposedly 'unknowable' and unmeasurable, and there is no way you could implement merit raises?

-ERD50

[kyounge1956]

Quote:

Originally Posted by Zarathu I think you misunderstand what I said(I perhaps pulled a Greenspan here). Right now the penalties for early retirement in the PA Teachers fund for example is not severe enough to prevent many teachers from taking early retirement and losing a couple of percentage points off their total salary. I believe its about 2% per year taken early. So if PA teachers were getting a 75,000 payment because they made 100,000 for the last three year(which is easily possible if you were an administrator) and you went out four years early, then that person's retirement benefit would only be dropped to 69,000. I'm proposing that early leaving 4 years early should forfeit 5% per year early so that leaving with a 75,000 per year pension gives you only a 60,000. Now this is a lot of money, and few teachers make that much money unless they are administrators, or superintendents. Z

I think I understood what you said, but I still don't understand your reason for saying it. ISTM it could be one of two things:

1. The penalty for retiring early should be 5% or so because that's the difference in the actuarial value of the two pensions, or
2. The penalty for retiring early should be 5% or so, even though that is more than the difference in actuarial value between the two pensions.

Which did you mean? and if the second, what difference does it make when people retire, as long as the actuarial value of each pension is the same? If, over a large number of teachers, the cost to the pension system is the same whether a teacher retires after 26 years with a $69K pension, or after 30 years with a $75K pension, IMO there is no benefit to anyone from forcing the first teacher to stick around for another four years.

Or did you mean something else altogether?

[kyounge1956]

Quote:

Originally Posted by Culture It seems to me that the obvious solution to pensions is the create a "defined contribution pension." This pension would have the following characteristics. 1) All contributions are held in a separate account in your name. 2) The money is invested by investment professionals. You have no input. 3) When you want to retire, your pension is the actuarially sound life annuity based on your current balance, including a capped COLA.(snip)

Quote:

Originally Posted by Zarathu What your suggesting for those in the current plans is probably illegal. (snip)

It would certainly require repeal and replacement of a big chunk of the Municipal Code to make these changes to the City of Seattle retirement system. Actually, plenty of government employees have something very similar to what you are describing, a 457b deferred compensation account. You choose the amount you want to save, direct your contributions to the Stable Value Fund, and use your balance to buy an annuity when you retire. But there are at least two reasons a 457 isn't the equivalent of a pension system, even assuming purchase of an annuity. First, a pension system has an employer matching contribution, while a 457 plan (at least mine) does not. Second, there is a limit on contributions to 457 accounts (same limits as a 401k), while contributions to a pension fund are a set percentage of salary. High-earning employees wouldn't be able to replace their current pension with the account you describe, because more money is going into the pension fund on their behalf (contribution plus employer match) than they are legally allowed to put into a 457, especially before age 50. Neither could not-as-high earners like me, who are making maximum contributions to a 457 in addition to the contribution + match that is going into the pension fund in my name.

[kyounge1956]

Quote:

Originally Posted by Texas Proud (snip) One of the ideas that I have not heard is that all public employees go onto SS... why not get everybody on that system... we all know why not... the one you got is a lot better than SS... and it does not cost you any more money... (well, I am assuming here... it did not in Texas)...

Lots of public employees are already in the Social Security system. I am (local government employee in Washington state), and so is my mother (retired schoolteacher, taught in NY, CA & WA and was in SS in at least one of these). Which government entities' employees are not in SS?

[Spanky]

Quote:

3. ...Performance- % of graduates, at a minimum standard. ......Accountability- some teachers need to fail along with their students. ......Efficiency- cost/pupil graduated.

Good measures. I might add academic performance per (test scores, % of students taking and passing advanced classes, proficiency in key areas (math, English, sciences). Administrators must also be accountable. Cost per student per year.

[Rustic23]

Education, a favorite topic, when I went to high school there was one principle, one ast. principle, two counselors that were also teachers, and two secretaries. This was a large Houston school with over 500 kids/graduates in the senior class. I was at the middle school that my daughter taught at recently. They had one principle, one ast principle, one principle for each of the three grade levels, one ast principle for each grade level, one counselor for each grade level, a security staff, as nursing staff, one secretary for each principle, and a few others floating around the office. This for a school with about 500 8th graders.

The problem with education is, it is run by educators!