Should publicly funded pensions start later?

[kyounge1956]

(snip)If retirement commitments are fully expensed the cost of of a DB cola pension (at current treasury rates) would be so high that the public would scream for change. (snip)

Is that a valid comparison? Aren't current treasury rates very low, making the price of an annuity equivalent to the pension a lot higher now than it would have been in the past? I don't know what the long term averages are, but I just took a quick look on the U.S. Treasury website, and the interest rate on long-term Treasuries is only about half of what it was 10 years ago (as far back as the data went on that web page). That's got to affect the price comparison.

 

[ERD50]

...Of course, I live in Illinois, the worst of the worse, ...

If the politicians are playing games with the funding or if tax payers disagree, then we need changes.

Of course, some people will say that the voters are responsible for these problems. Later today, I'll print out the ballot for my area and study it. Maybe one of those people could help me to find the correct boxes to check to fix this problem?

-ERD50

 

[Emeritus]

Of course, some people will say that the voters are responsible for these problems. Later today, I'll print out the ballot for my area and study it. Maybe one of those people could help me to find the correct boxes to check to fix this problem?

-ERD50

You do know, of course, that the word "responsible" does not mean "able to control". You can in fact be fully responsible for people or actions over whom you have no control.

 

[Emeritus]

My bottom line is that if the pensions are treated as a current expense and are fully funded by conservative actuarial standards, and if the tax payers agree, they're fine. If the politicians are playing games with the funding or if tax payers disagree, then we need changes.

I'm not sure what you mean by "tax payers agree". Voters elect politicians in a republican form of government.

I Agree otherwise.

 

[nun]

Having a DC plan means that their contributions along with their earnings are theirs... if their contributions do not earn, it is their problem...


But with the DB plan... their contributions is all they have to put in... they are 'guaranteed' to get their pension no matter what happens with earnings... no matter what spiking occurs (which, BTW can not happen in a DC plan).. no matter what happens with final salary games (working as a clerk for 20 years and then get a great job for the last 5)...


SOOO, everybody who keeps talking about how they put their money into the system and wants to get their money out should be willing to convert to a DC right now.... yep, I thought not....
.

I had the choice of a DC or DB plan and chose DC because I knew that I would be retiring before I'd worked for the state for 10 years. It takes 10 years to vest in the DB plan.

Spiking is gaming the system and should be stopped. The bad behaviour of some should not be used as a criticism of the DB pension system. Spiking is just another example of greed and we know that that happens across society.

 

[Texas Proud]

I had the choice of a DC or DB plan and chose DC because I knew that I would be retiring before I'd worked for the state for 10 years. It takes 10 years to vest in the DB plan.

Spiking is gaming the system and should be stopped. The bad behaviour of some should not be used as a criticism of the DB pension system. Spiking is just another example of greed and we know that that happens across society.

It might not be called spiking, but I also think that using final 3 or 5 years of salary is not correct... I have a real life example...

Person worked full time a few years... then went part time for a long time... then went full time at the end... got a great pension that was not based on their lifetime contributions.... someone has to make up for the higher pension....

Another is when someone is a teacher for many years (say 20 to 25)... then either become a principal or goes into admin with a lot higher salary just to increase the pension.... again, the pension is not based on the lifetime contributions...

I would suggest that most people would not call this spiking... some might... but their contributions do not come close to paying for their pension.. that is where I disagree with all the people who say 'I paid into the system and should get my full pension and you don't touch it'.... like the fully paid for the higher pension.... which they did not...

Sure, you got someone like my sister who worked 41 years as a teacher... did not change jobs etc. etc... but those are rare IMO...

 

[MichaelB]

Is that a valid comparison? Aren't current treasury rates very low, making the price of an annuity equivalent to the pension a lot higher now than it would have been in the past? I don't know what the long term averages are, but I just took a quick look on the U.S. Treasury website, and the interest rate on long-term Treasuries is only about half of what it was 10 years ago (as far back as the data went on that web page). That's got to affect the price comparison.

You have a point. Public Sector accounting standards recommends funded liabilities be discounted “using the long-term expected rate of return on plan investments to the extent that current and expected future plan net assets available for pension benefits are projected to be sufficient to make benefit payments, and a high-quality municipal bond index rate beyond the point at which plan net assets available for pension benefits are projected to be fully depleted.” Unfunded liabilities should be discounted using a rate that is “based on an index rate for governmental bonds of a high quality commensurate with the quality of the pension liability.”

IOW, for funded pension liabilities, discount rate = expected return. For unfunded liabilities, discount rate = government bond rate of similar risk profile

The potential for abuse is quite high – as seen by years of pension fund manipulation by business. This just makes a greater case for DC plans for non-vested employees.

 

[ziggy29]

Spiking is gaming the system and should be stopped. The bad behaviour of some should not be used as a criticism of the DB pension system. Spiking is just another example of greed and we know that that happens across society.

I agree. But I also think that if pensioners and those supporting the current model of public DB pensions want to eliminate some of the outrage then they need to join the fight against spiking as well. It's not only in their best interest to help alleviate some of the anger out there, but also because spiking makes the pension plans less solvent for those who aren't abusing the system.

 

[dex]

Considering that a large majority (see the info I posted in a previous thread) of private industry can attract the workers they need without offering a pension; the real question is:
Should government pensions be eliminated? (It could be phased out over time.)

 

[GregLee]

Person worked full time a few years... then went part time for a long time... then went full time at the end... got a great pension that was not based on their lifetime contributions....

That's pretty much what I did, except I didn't go back to full time at the end. But the DB formula apparently uses base pay, not the part time fraction of it, so going full time at the end doesn't have to be part of the strategy.

Of course, my pension is not based on my lifetime contributions (7% of salary). Since it's a DB pension, why would it be?

 

[youbet]

It might not be called spiking, but I also think that using final 3 or 5 years of salary is not correct... I have a real life example...

Person worked full time a few years... then went part time for a long time... then went full time at the end... got a great pension that was not based on their lifetime contributions.... someone has to make up for the higher pension....

Another is when someone is a teacher for many years (say 20 to 25)... then either become a principal or goes into admin with a lot higher salary just to increase the pension.... again, the pension is not based on the lifetime contributions...

I would suggest that most people would not call this spiking... some might... but their contributions do not come close to paying for their pension.. that is where I disagree with all the people who say 'I paid into the system and should get my full pension and you don't touch it'.... like the fully paid for the higher pension.... which they did not...

...

These are excellent examples TP. And, yes, it does seem imprudent to use only the final few years of employment to determine the pension amount.

I'd suggest that they do it like SS and use the highest 30 years, wage growth adjusted. Then, like with SS system, if someone was part time for the first 20 years, they couldn't get a full time pension by switching to full time work at the end.

However it comes out, the system must be fully funded. And this is not possible when employees contribute at part time or low grade level rates but later collect at full time, high grade level rates.

 

[youbet]

I'm not sure what you mean by "tax payers agree". Voters elect politicians in a republican form of government.

I Agree otherwise.

That's a good point Emeritus. Silly me, I keep craving a system where there is a positive correlation between what the tax payers want their money to be spent on and what it is actually spent on. Just dreaming I guess......

 

[GregLee]

I'd suggest that they do it like SS and use the highest 30 years.

I don't see the point in such fiddling with DB systems. For one thing, no evidence is given that there is a problem that the change will fix. For another, you probably can't make the change for current workers or retirees, so it's not going to have any effect until 30 years from now (for this particular suggestion). And for still another, it ignores the part the retirement system plays in job recruitment/retention/pay.

 

[youbet]

Of course, some people will say that the voters are responsible for these problems. Later today, I'll print out the ballot for my area and study it. Maybe one of those people could help me to find the correct boxes to check to fix this problem?

-ERD50

There are candidates on the ballot in Illinois who want to aggressively reduce salaries and pensions for public employees. My wife is retired on a public pension in Illinois and belongs to the retired member category of her union. You should see some of the emails from her union flying in here bashing the "lower wages and and lower pensions" candidates! Real venom, shocking really, but interesting reading in interesting times.

 

[ziggy29]

For another, you probably can't make the change for current workers or retirees

I feel I must preface these remarks by saying that I do not advocate changing the deal for those already in the system... but it was certainly "changed" for the worse on many of us (myself included) in the private sector.

And for still another, it ignores the part the retirement system plays in job recruitment/retention/pay.

If recruiting/retention were as important as you say here, the private sector would still be handing out pensions to encourage it. To use (not intending to pick on) a random occupation, if it's not important enough to retain a Megacorp filing clerk by dangling a pension in front of them, why is it that important to retain a public sector filing clerk?

 

[youbet]

I don't see the point in such fiddling with DB systems. For one thing, no evidence is given that there is a problem that the change will fix. For another, you probably can't make the change for current workers or retirees, so it's not going to have any effect until 30 years from now (for this particular suggestion). And for still another, it ignores the part the retirement system plays in job recruitment/retention/pay.

The point is that in some states, public pensions are not being fully funded in a timely manner. Using only the last few years of salary data to determine the pension amount aggravates this. See TP's nicely done post above.

If we don't make changes because the impact is years away, are you suggesting that we make changes that affect current employess, even those near retirement?

My proposal would not make it more difficult to retain or recruit employees if pay levels are adjusted to be competitive and adequate to attract plenty of well qualified people.

 

[av8er]

I don't think most people join the military for the pension, so salary is probably more of a motivator.

I agree with Nords that most people don't join the military for the pension, but I think the promise of a good pension after 20 years of honorable service certainly influences people's decision to stay in past their initial commitment and make it a career...it certainly did for me. I originally joined the military because:

1) I wanted to serve
2) I wanted an education and did not have the money to pay for it and did not want to go into debt
3) I wanted to see the wider world outside of the small town in which I grew up

In my first 10 years of service, the Army provided me with a very good undergraduate and graduate education as well as a lot of specialized training, clearances and management experience. I have no doubt that with that education/training/experience I could have landed a good job in the private sector after my initial military commitment that would not require me to kill people who are actively trying to kill me and my coworkers, would not require me to live in close proximity to the aforementioned people, and would not require me to literally spend years away from my wife and kids in some of the more awful places on the planet. And in return for not having to do those things, I'd likely receive a 401k with a match.

I chose to stay in the military because:
1) I view the profession of arms to be a noble profession
2) I enjoy the high caliber of people with whom I work
3) there is a promise of a generous pension after 20 years of service

Although I didn't stay for the pension alone, it was a significant factor in my decision...I'm pretty sure that I could find another rewarding profession that had good people with which to work. The promise of a pension after 20 years of service is what convinced me to stay in the military and make it a career...without it, I would not have stayed in this line of work. I suspect that I'm not alone.

 

[Texas Proud]

I don't see the point in such fiddling with DB systems. For one thing, no evidence is given that there is a problem that the change will fix. For another, you probably can't make the change for current workers or retirees, so it's not going to have any effect until 30 years from now (for this particular suggestion). And for still another, it ignores the part the retirement system plays in job recruitment/retention/pay.

why can you not change it now Federal law only says you can not give less than what is already earned... so, we change it now for everybody... then people have to choose if they want to continue to work or not...

Some people will continue to work, but their DB amount will not go up any.. but they will not earn any less than the formula says they would get when the change occured... it has happened to a lot of people in the private sector...

At my mega, they changed from a DB to a DC... and 'converted' the DB to a cash amount... someone with 20 or more years basically was not earning any more pension benefits as the old calculation was higher than their cash account.... even though their cash account was growing by the extra cash that was being deposited in it... they sued and lost... because mega always promised they would not get any less than the formula amount... when it was changed...

 

[Texas Proud]

I agree with Nords that most people don't join the military for the pension, but I think the promise of a good pension after 20 years of honorable service certainly influences people's decision to stay in past their initial commitment and make it a career...it certainly did for me. I originally joined the military because:

1) I wanted to serve
2) I wanted an education and did not have the money to pay for it and did not want to go into debt
3) I wanted to see the wider world outside of the small town in which I grew up

In my first 10 years of service, the Army provided me with a very good undergraduate and graduate education as well as a lot of specialized training, clearances and management experience. I have no doubt that with that education/training/experience I could have landed a good job in the private sector after my initial military commitment that would not require me to kill people who are actively trying to kill me and my coworkers, would not require me to live in close proximity to the aforementioned people, and would not require me to literally spend years away from my wife and kids in some of the more awful places on the planet. And in return for not having to do those things, I'd likely receive a 401k with a match.

I chose to stay in the military because:
1) I view the profession of arms to be a noble profession
2) I enjoy the high caliber of people with whom I work
3) there is a promise of a generous pension after 20 years of service

Although I didn't stay for the pension alone, it was a significant factor in my decision...I'm pretty sure that I could find another rewarding profession that had good people with which to work. The promise of a pension after 20 years of service is what convinced me to stay in the military and make it a career...without it, I would not have stayed in this line of work. I suspect that I'm not alone.

And my point would be.... their is a salary that would have convinced someone with your skill and rank to stay in the military... without a 'generous pension' (now, learning from Nords, the pension is not as generous as I had thought... but using your words for argument sake)...

IMO, paying the market rate which might include a DC plan, or even a DC along with a savings plan with matching funds would be more cost effective in the long run and most certainly a more known current cost than the current system...


And only a few times has someone mentioned the fact that most public sector jobs (not sure about military, but since we are in a war it still might be) are pretty safe... it is hard to just get rid of someone who does not perform in their job... I hear about if from my sister and my friend... but I am not going there...

 

[GregLee]

why can you not change it now

It couldn't be changed here in Hawaii for the state retirement system, and in some other states, because the state constitutions prohibit such a change. In other places, there are laws that could prevent impairing a contract made with current retirees and possibly current workers. I understand there is some litigation going on about this -- don't know the details.

 

[nun]

It might not be called spiking, but I also think that using final 3 or 5 years of salary is not correct... I have a real life example...

Person worked full time a few years... then went part time for a long time... then went full time at the end... got a great pension that was not based on their lifetime contributions.... someone has to make up for the higher pension....

Another is when someone is a teacher for many years (say 20 to 25)... then either become a principal or goes into admin with a lot higher salary just to increase the pension.... again, the pension is not based on the lifetime contributions...

I would suggest that most people would not call this spiking... some might... but their contributions do not come close to paying for their pension.. that is where I disagree with all the people who say 'I paid into the system and should get my full pension and you don't touch it'.... like the fully paid for the higher pension.... which they did not...

Sure, you got someone like my sister who worked 41 years as a teacher... did not change jobs etc. etc... but those are rare IMO...

I agree that DB plans should use a benefit calculation similar to SS which is based on 35 years of wages. Of course previous wages should be converted to today's dollars.

 

[BigNick]

Person worked full time a few years... then went part time for a long time... then went full time at the end... got a great pension that was not based on their lifetime contributions.... someone has to make up for the higher pension....

If that's what happened, then the system is badly designed. In my employer's DB system, if you work 50% for a year, you acquire 0.5 years worth of entitlement at your full-time salary. Thus, your final pension is (all other things being equal) still a function of your contributions.

On the other hand, our layoff package (for when jobs are cut) does have this bug. It was apparently drafted in a hurry, or on the basis that we'd never have to apply it. You get your final paycheck, including more or less all allowances and benefits, times a multiplier for years of service. So people who are working part-time when they hear about their layoff - we usually give lots of notice because layoffs happen in next year's budget - have a huge incentive to go full-time for the last couple of months. That's indefensible (as a policy; I would never criticise anyone who went for it!).

 

[MichaelB]

That's a good question. I don't think most people join the military for the pension, so salary is probably more of a motivator

They may not join for the pension but they may stay for it. Retaining people is as important as attracting them.

 

[ziggy29]

They may not join for the pension but they may stay for it. Retaining people is as important as attracting them.

I can certainly see that for the military and emergency "first responder" occupations, and perhaps for teachers. I just don't think that applies to clerical, administrative and technical positions which have clear private sector equivalents, and where the private sector hasn't judged retention to be valuable enough to offer pensions. If retention and longevity really *were* that important to the functioning of an organization, there would be pensions in those positions.

 

[Bimmerbill]

I see a lot of federal employees here looking to get into management for the last 3 or 4 years of their career. Since fed pension is based on "high 3" this is a way to bump up your high 3 at the end of your career.

A lot of them stay on tho, and don't retire after their 3 or 4 years. Maybe they get used to the increased salary?