More Public Pension Woes—Constructive Suggestions Wanted

[HsiaoChu]

$250K seems incorrect (too high) if we are referring to a teacher's salary. I came up with $91,272 based on the following assumptions:
current salary: $57,179.4
merit increase: 5% yearly
contribution: 9.5% of salary
duration: 33 years..................................

I made up the numbers to make the point. I have a right to keep my actual salary numbers to myself. Your assumptions are incorrect. There is no such thing as merit increase, and increases are not steady, some years higher some years lower. My salary started at a different number and ended at a different number. The contribution rate is not correct. None of your assumption are correct. You don't include employer required contributions to the total, nor state government required contributions to the total pension situation. I'm not planning on enlightening you to the correct assumptions since doing so would violate my privacy and we have no idea who has access to the board and to the financial data that we might post on it.

I had no intent of giving you any figures which are accurate in any way, only to give an example to make my point. No Offense, and I'm not taking offense.

Z

 

[ERD50]

Z - you are quite the paradox. I'm trying to figure out whether, based on your comments in this thread,

http://www.early-retirement.org/forums/f32/ok-the-title-above-says-49699-2.html#post925444

I should report your post?

-ERD50

 

[HsiaoChu]

Z - you are quite the paradox. I'm trying to figure out whether, based on your comments in this thread,

http://www.early-retirement.org/forums/f32/ok-the-title-above-says-49699-2.html#post925444

I should report your post?

-ERD50

It didn't look like anyone wanted to move it to the political arena. And since I decided that maybe, like you said elsewhere, I was a little too sensitive that day, I would just let it go, and go with the flow, and ignore anything that bothered me too much.

So..... I'm moving on. Besides like I said, I was just a bit edgy.

Do what you think you have to do? I try to think out of the box most of the tyme and stay as enigmatic as I can.

Z

 

[ERD50]

I would just let it go, and go with the flow, and ignore anything that bothered me too much.

So..... I'm moving on.

Z

Sounds like a plan! Good to hear it.

-ERD50

 

[Spanky]

I had no intent of giving you any figures which are accurate in any way, only to give an example to make my point. No Offense, and I'm not taking offense.

No actual numbers are needed to illustrate why the pension plan is underfunded.

 

[kyounge1956]

That's a great way to game the system. The whole pension plan should be based completely on amount put into it. My mega corp pension plan deposits a small account of money every year into an account. When I am eligible for retirement, I can take the accumulated amount with me.

I'm not sure what you mean when you say the pension plan should be based completely on the amount of money put in. How would that work in practice? Is what you have in mind different than 401k and other defined contribution plans?

 

[HsiaoChu]

No actual numbers are needed to illustrate why the pension plan is underfunded.

OK... but I wasn't commenting on the underfunding of defined benefit plans, I was commenting on the fact that taking out what you put in is not any different that taking what you put in and putting it into CD's and then cashing them in later.

The bottom line is that most defined benefit plans are in my estimation giant ponzi schemes. I'm happy to have one, but when any portion of the payout is coming form the people who are still working, which is what social security is, then its just a giant ponzi scheme.

Some pension plans are more ponzi than others.

BUT BE THAT AS IT MAY, THE BOTTOM LINE IS THAT..... many state pension plans are locked in stone. There are solutions.

As I've said before, these solutions involve:

1. an ending of the high level defined benefit for all new employees, either a removal altogether or a reduction to a base level much like when you work as a waiter they give you a kind of stipend of 30% but your must make all the rest in tips.

2. An increase in the payments into the funds by the existing employees

3. An increase into the funds by the employers but spread over a long period of time and not able to be reduced simply because it looks like a good financial set of years, or at least as long as the fund is 100% funded(in PA it has to be 86% funded by law).

4. An extension of the period of time before the defined benefit can actually be taken, such as 62 or 65 or even 67 instead of 58, regardless of how many years in the program.

5. Very severe penalties for early retirement that amount to 10's of percentage points for each year rather than a couple.

I think these are the things that WILL HAPPEN. I'm not sure I agree, but I don't see any way out of them. And i believe that Social Security will also be forced to intervene in this way also.

BUT..... Those who are currently close to retirement(within 15 years) are not in a position to make other arrangements in regard to their pensions, and these people must be allowed to get what they were given originally.

Just my opinion.....

Z

 

[Spanky]

I'm not sure what you mean when you say the pension plan should be based completely on the amount of money put in. How would that work in practice?

I meant to say that funds (employee contribution + employer contribution, if any) such pension plan should be invested similar to a 401K plan. However, the plan decides on how the money is invested.

Is what you have in mind different than 401k and other defined contribution plans?

No, the only difference is that you do have the option how the money is invested.

 

[Spanky]

I think these are the things that WILL HAPPEN. I'm not sure I agree, but I don't see any way out of them. And i believe that Social Security will also be forced to intervene in this way also.

You might be right.

 

[kyounge1956]

OK... but I wasn't commenting on the underfunding of defined benefit plans, I was commenting on the fact that taking out what you put in is not any different that taking what you put in and putting it into CD's and then cashing them in later.

The bottom line is that most defined benefit plans are in my estimation giant ponzi schemes. I'm happy to have one, but when any portion of the payout is coming form the people who are still working, which is what social security is, then its just a giant ponzi scheme.

Some pension plans are more ponzi than others.

BUT BE THAT AS IT MAY, THE BOTTOM LINE IS THAT..... many state pension plans are locked in stone. There are solutions.

As I've said before, these solutions involve:

1. an ending of the high level defined benefit for all new employees, either a removal altogether or a reduction to a base level much like when you work as a waiter they give you a kind of stipend of 30% but your must make all the rest in tips.

2. An increase in the payments into the funds by the existing employees

3. An increase into the funds by the employers but spread over a long period of time and not able to be reduced simply because it looks like a good financial set of years, or at least as long as the fund is 100% funded(in PA it has to be 86% funded by law).

4. An extension of the period of time before the defined benefit can actually be taken, such as 62 or 65 or even 67 instead of 58, regardless of how many years in the program.

5. Very severe penalties for early retirement that amount to 10's of percentage points for each year rather than a couple.

I think these are the things that WILL HAPPEN. I'm not sure I agree, but I don't see any way out of them. And i believe that Social Security will also be forced to intervene in this way also.

BUT..... Those who are currently close to retirement(within 15 years) are not in a position to make other arrangements in regard to their pensions, and these people must be allowed to get what they were given originally.

Just my opinion.....

Z

I doubt that #5 could be justified actuarially. Adding one extra year does not make tens of percentage points difference in the total amount paid out to that person in benefits. As I understand it, if the actuaries have done their math right, it doesn't really matter when you retire, because all the options are equal from the actuarial viewpoint. That's how a pension system knows how much to reduce the basic benefit if you want your pension to continue to your beneficiary after your death, or for a fixed term of years, or if you take a lump sum.

It could be that public pension underfunding originates at least partly because the actuaries are not doing their math correctly, or are using unrealistic assumptions or outdated life expectancy data. Correcting those problems might require a significant overall reduction in benefits, and possibly a greater reduction of benefits for those who retire early, but I don't see any justification for penalizing early retirees more than is required to make their benefits actuarially equivalent to the pensions of those who work longer.

 

[Tadpole]

What I'd like to know is, if your ability to ER depended on this job and this pension fund, what would you suggest?

Since we all know that eventually these problems will be solved by a clawback of savings from one boomer to pay the other, why not make the clawback fun by setting up retiree casinos with 85% of the profits devoted to solving retiree problems including state and local pensions.

I am retiring to WA soon and would prefer to transfer my money this way since regressive sales taxes would probably hurt the very people that need the help. Let the Microsoft and government pension people voluntarily part with their dough.

 

[HsiaoChu]

I meant to say that funds (employee contribution + employer contribution, if any) such pension plan should be invested similar to a 401K plan. However, the plan decides on how the money is invested.


No, the only difference is that you do have the option how the money is invested.

I think that's only reasonable. Times change. Unless aliens land and want us to work for them, or some major boom takes place with technology that one we have access to the USA is going the way of Britain, and needs to get out of the way for the next booming economy west of us.

 

[HsiaoChu]

I doubt that #5 could be justified actuarially. Adding one extra year does not make tens of percentage points difference in the total amount paid out to that person in benefits. As I understand it, if the actuaries have done their math right, it doesn't really matter when you retire, because all the options are equal from the actuarial viewpoint. That's how a pension system knows how much to reduce the basic benefit if you want your pension to continue to your beneficiary after your death, or for a fixed term of years, or if you take a lump sum.

It could be that public pension underfunding originates at least partly because the actuaries are not doing their math correctly, or are using unrealistic assumptions or outdated life expectancy data. Correcting those problems might require a significant overall reduction in benefits, and possibly a greater reduction of benefits for those who retire early, but I don't see any justification for penalizing early retirees more than is required to make their benefits actuarially equivalent to the pensions of those who work longer.

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

 

[Bimmerbill]

I wish my fed pension was 2% penalty per year. It is 5% and no COLA until age 62 if I take an early retirement at 56.

 

[ziggy29]

I wish my fed pension was 2% penalty per year. It is 5% and no COLA until age 62 if I take an early retirement at 56.

Yeah, under CSRS there was no "early out" reduction for retirement as young as 55, and *earlier* than that it was only 2% per year.

The feds were ahead of the curve in terms of properly addressing unsustainable pension costs when it stopped enrolling new hires into CSRS. I believe that to the extent it makes sense to keep offering DB pensions to new hires in most (perhaps not all) public occupations, state and local governments should switch new hires to a FERS-like plan.

 

[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]

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]

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]

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]

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]

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]

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.