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State Pensions again
Old 12-03-2012, 07:44 AM   #1
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State Pensions again

We have been back and forth on whether state pensions are promises that should be kept or promises that can't be kept or something in between. The answer means a lot to more than a few ERdotorg members. Illinois Governor Pat Quinn has contracted with the Khan Academy to post a lesson showing why Illinois should keep it's promise. Seems like an unlikely way to get your point across to a broad public unless he hopes the effort will go viral.

Edit: also seems a fairly weak lesson if Quinn is trying to show the why's about keeping the promise.
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Old 12-03-2012, 08:05 AM   #2
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I am very torn on this issue, for both public pensions (and to a lesser degree for private pensions). I thought the video was very sensible.

I can see the logic where plan participants have planned their retirements based on these pension promises and in many cases may have accepted lesser comp than what they could have had in the private sector and in many situations it would be very unfair to renege on those promises.

On the other hand, it is hugely expensive and if the pensions had been properly funded all along then the problem may have not occurred because the fact that we can't afford these promises would have been identified (and hopefully addressed) a lot earlier.

I'm mostly peeved at managements and unions that negotiated these deals because they either knew they were unsustainable and kicked the can down the road or they should have know these promises were unsustainable. Unfortunately, that doesn't help solve the problem.
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Old 12-03-2012, 11:17 AM   #3
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I will take a look at the video at home....


But, I see a few general ways that people can choose....

1. Do not pay what you had promised by cutting payouts to everybody, including people already retired. Very few say they want this.

2. Stop the bleeding by changing the rules going forward for ALL people who are currently working. IOW, starting today this is your new formula. We will pay you for what you have earned to date, but any new work you do will be under the new formula. This keeps the promises that were made, but also means that you and your coworker is on the same plan. It fixes the problem over time. No promises are broken. Sure, the person who has put in 20 years thinks it stinks, but in reality it has not.

3. Change the plan for only new people.... keep all older employees on thier current plan. To me, this does not fix the problem. It still keep the piling on to the taxpayer costs that he can not afford. It also makes co-workers different.

4. Do nothing. This is the worst thing to do. It means raising taxes to a level that can not be sustained and probably a slow death of the gvmt entity as people move.
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Old 12-03-2012, 11:48 AM   #4
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It seems that after w*rking 20 years and receving a full pension in many areas, especially police and fire, there are many years to be on the receiving end. I know that teachers' pensions vary state-by-state moreso. But it's not as if the police and fire, etc., are not properly compensated during those 20 years, especially compared to what a similar position earns in the private sector. The defined benefits seem to become a Ponzi event and paid for by the next generation. I would pay these public employees a higher salary along the way, and have a defined contribution system, such as the private sector does for IRAs, etc.
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Old 12-03-2012, 01:50 PM   #5
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The main reason we're having this discussion, IMO, is this:

1. Historically, public sector employees accepted a tradeoff: lower wages than the private sector in exchange for better benefits and more job security. It was this way for decades.

2. In the last 10+ years, wages and benefit increases for the private sector lagged *badly* compared to those in the public sector for much of that time. And over the last 20 years or so, private sector pensions and retiree health insurance plans began to go the way of the dodo in addition to stagnant or falling real wages.

3. Historically, the private sector could afford the pension and benefit deal because their overall compensation was rising in tandem with public sector employment costs.

4. The private sector compensation decline described in (2) is making it harder and harder for us to afford anything close to the historical public sector wage and benefit value increases that were just assumed for the first few decades after WW2.

Rock, meet hard place. There is no neat and tidy way out of this. Something has to give -- either the shrinking wages of the private sector taxpayer have to start growing again, or we have to get a handle on the future growth of the cost of public sector pension and retiree health insurance plans so they stop rising faster than overall tax revenues from workers. It stinks, but that seems to be the hand we are playing with now.
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Old 12-03-2012, 02:30 PM   #6
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Very well summarized Ziggy. Very tough topic. I remember the last melee thread on this topic, a sad mix of facts and hopeless 'what's fair' appeals...so I won't weigh in again.
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Old 12-03-2012, 02:53 PM   #7
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It seems that after w*rking 20 years and receving a full pension in many areas, especially police and fire, there are many years to be on the receiving end. I know that teachers' pensions vary state-by-state moreso. <snip>
I think it is important to define what we mean by things such as 'full pension'. These things do vary quite a bit from state to state and even locally.

So, I ask what you mean by the term 'full pension'. I know what I think it means, but we may not be on the same wavelength.
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Old 12-03-2012, 03:25 PM   #8
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2. In the last 10+ years, wages and benefit increases for the private sector lagged *badly* compared to those in the public sector for much of that time.
This may be true for some public sector jobs. At the federal level (where I have my experience) I don't believe it is true for science, engineering and technology (IT) positions.

I'd say that even the State of NH IT jobs pay very poorly compared to private sector.

I am sure its different in other locations, but we are close enough to Boston to see high private sector IT pay.
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Old 12-03-2012, 03:30 PM   #9
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This may be true for some public sector jobs. At the federal level (where I have my experience) I don't believe it is true for science, engineering and technology (IT) positions.

I'd say that even the State of NH IT jobs pay very poorly compared to private sector.

I am sure its different in other locations, but we are close enough to Boston to see high private sector IT pay.
Okay, I think that's a fair point. Science, IT and engineering tended to pay much more in the private sector and probably still do.

It's been my impression that public sector compensation puts more emphasis on the number of years of education, whereas the private sector puts more emphasis on the specific skill or degree. Take (for example) history majors and engineering majors with 10 years of experience, and I'll bet the pay gap between them is much less in the public sector than in the private -- with history majors making as much in the public sector as the private (if not more), and the engineering majors earning (possibly much) less.
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Old 12-03-2012, 03:52 PM   #10
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So, I ask what you mean by the term 'full pension'. I know what I think it means, but we may not be on the same wavelength.
For example, in Florida where I now reside, twenty years of employment was when a Miami cop could retire at the full pension being offered 15 years ago (I haven't followed it since). I do not know what % of salary full pension was. I w*rked for myself for 20 years and only have an IRA and savings. I agree with previous post whereby in the past things were more balanced and over the years we are at rock meeting hard place.
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Old 12-03-2012, 03:57 PM   #11
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I think it is important to define what we mean by things such as 'full pension'. These things do vary quite a bit from state to state and even locally.

So, I ask what you mean by the term 'full pension'. I know what I think it means, but we may not be on the same wavelength.
To me a full pension is one which provides a retirement benefit of at least 2%*years of service of the final salary at 65 or earlier. So a notable exception to this definition is current federal workers, except for the military, but the vast majority of state and local pension are covered.
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Old 12-03-2012, 04:58 PM   #12
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To me a full pension is one which provides a retirement benefit of at least 2%*years of service of the final salary at 65 or earlier. So a notable exception to this definition is current federal workers, except for the military, but the vast majority of state and local pension are covered.
I cannot speak for other states, but in my home state the above descriptionis far more generous than the state pension plan. In other words, the vast majority of the state workers in my home state cannot retire on a full pension (based upon the above description.) My home state's definition of the full retirement benefit is simply not as generous as the above definition. Note: The exceptions are certain public safety employees and people in a very old plan that has been closed for almost 40 years.

I offer this information, not to split hairs or criticize others, but to show how difficult it is to discuss these matters unless we really nail down the details and definitions.
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Old 12-03-2012, 05:03 PM   #13
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I cannot speak for other states, but in my home state the above descriptionis far more generous than the state pension plan. In other words, the vast majority of the state workers in my home state cannot retire on a full pension (based upon the above description.) My home state's definition of the full retirement benefit is simply not as generous as the above definition. Note: The exceptions are certain public safety employees and people in a very old plan that has been closed for almost 40 years.

I offer this information, not to split hairs or criticize others, but to show how difficult it is to discuss these matters unless we really nail down the details and definitions.

That is interesting Chuck, what state is it and what are the typical benefits?
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Old 12-03-2012, 05:34 PM   #14
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That is interesting Chuck, what state is it and what are the typical benefits?
Here are the differences between my state's plan and your original description of full retirement, as I understood it. Forgive me if I am in error.

First, the final year's pay is not used alone to figure the benefit. The state uses an average of an employee's highest five consecutive years, usually this is the last five years of employment but it does not have to be. This reduces the chance of 'spiking' the pension.

Second, benefits are reduced when a person retires before 65. They use actuarial tables to make this adjustment.

The 2% per year rule is used.

Also, workers put in about 6% of their salary each year towards their pension. It's not all taxpayer money.
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Old 12-03-2012, 06:58 PM   #15
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OK - I will also weigh in.... I am a CPA, and YES, I **did** trade down current income for stable hours, a stable employer, known pension, and desirable medical benefits. WHEN HIRED, there was a promise of these things. My pension plan is 2% per year service (pegged to age 55), gradually increasing to 2.5% per year of service for retirement @ age 63+, with reductions down to 1.1% per year of service for retiring as early as age 50. Mine was calculated on average of HIGHEST THREE YEARS. In our case, the employer paid the employee portion for us as an added benefit. They have stopped that since i retired - the employees now contribute THEIR 6 or 7% out of their pay checks. Medical is great - Blue Cross HMO, 100% of the premium for the retiree and 90% for spouse. We pay $65 a month. Dental, no premium for retiree or spouse. Plan covers 80% with a cap on annual costs... i THINK the annual cap is something like $1,500.

Yes, we have great benefits. BUT remember, that was "the deal" when we were hired, and went into the decision to work for that employer. I worked there 21+ years and "bought" another 5 years of service. So at age 55 1/2 the formula was 2.03% x 26+ years = 53% of salary. The last 8 YEARS of my tenure I was funding BOTH a 457 plan AND the 401(k) to the maximum amounts - in the range of 20% EACH. So, we were ALREADY living on essentially 60% of my "Gross"... and after recognizing that I no longer pay INTO Social Security, my *net* monthly pension is slightly MORE than what i was bringing home after deduction for the 401/457. It made the transition very smooth. Then I qualified for SS disability, and so we are doing JUST FINE.
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Old 12-03-2012, 09:20 PM   #16
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This is an argument without end. Anyone who pays these pensions through his taxes with no offsetting credits from a check for him or some family members, wants to see them curtailed. Though he may not admit that, especially around here. Anyone who gets one of these pensions very much wants to see it continue.

All this "promise, fairness, only right, the deal" stuff is pure rhetoric. Pretty good rhetoric too. But anybody knows that new conditions bring about restucturings, though of course they will be fought tooth and nail.

I think these pensions will continue until the youknow hits the fan, which it will eventually. As Mrs. Thatcher is reported to have said, socialists are very successful until they can't borrow any more money.

An interesting twist on this is being tested now. The treasury is doing much of its borrowing directly from the Fed. A sane investor would not be buying securities at the yields the US government is now offering, but what does the Fed care, it is creating the money out of thin air. It is acting upon what can be called "non-economic" motivations.

Ha
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Old 12-03-2012, 10:28 PM   #17
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Here are the differences between my state's plan and your original description of full retirement, as I understood it. Forgive me if I am in error.

First, the final year's pay is not used alone to figure the benefit. The state uses an average of an employee's highest five consecutive years, usually this is the last five years of employment but it does not have to be. This reduces the chance of 'spiking' the pension.

Second, benefits are reduced when a person retires before 65. They use actuarial tables to make this adjustment.

The 2% per year rule is used.

Also, workers put in about 6% of their salary each year towards their pension. It's not all taxpayer money.
It seem me the only difference between what I specified is pay is calculated at the highest five consecutive years, which I agree is a better system. Given pay raises over the last decade of say 3%. The difference between pension benefit and say the final year is only 6% not huge amount.

I and most longtime forum members understand that any many case public employees also contribute to their pension. The problem in a nutshell is that the combine contribution by the public employes and their employers have not nearly enough.

My rule of thumb is that for the full pension plan where the employee contributes X% and the employer contributes y% of the employees salary, X+Y needs to be about 25% for 2%*years of service benefit. Typically what I have seen in public pension plans is that X is between 6-8% and Y is between 8-12%. Leaving a shortfall of 5-10%

I arrived at this rule of thumb, by assuming private sector worker contributed X and his employer Y in a 401k, his salary increased faster than inflation (merit/experience pay) . At retirement age, the lump sum was converted to a annuity, with a capped COLA increase, and with 50% survivor benefit for the same age spouse.

(I should add I invite others to check my calculation, which were performed under different under economic conditions. Relatively small changes in investment rates, inflation, and merit/experience pay calculation can make a big difference)

As Ziggy nicely summarized this systematic underfunding of pension plans by 5-10% was always a problem, but since the economic crisis it has become a monster problem. There is no good solution to it.
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Old 12-04-2012, 12:36 AM   #18
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It seem me the only difference between what I specified is pay is calculated at the highest five consecutive years, which I agree is a better system.Given pay raises over the last decade of say 3%. The difference between pension benefit and say the final year is only 6% not huge amount. (snip)
Do you mean 3% raises, or 3% inflation adjustment? An average of 3% COLA over the last ten years might well be correct, but if you mean the purchasing power of public employees' pay goes up 3% a year, I don't know if that's a valid across-the-board assumption. I know it doesn't apply to my salary. I don't remember the last time I got an actual raise. This is not a complaint; it was my own choice not to seek a higher job title than the one I have now. (In fact, several years ago I took a voluntary downgrade, which resulted in a significant pay cut, but that's another story.) In my city at least, without moving to a higher job title, raises stop after 5 years in a position, and after that it is COLA only.

I'm not sure what you mean about the difference between pension and final year, but again, I question whether it's a valid assumption that the typical public employee's pension will be 94% of their final salary (if that's what you meant by a 6% difference). The maximum pension benefit in my retirement system is 60% of the average of 3 highest years' salary, regular hours only (IOW you can't "spike" your pension by working a lot of overtime). There is an exception for some employees. I've never understood exactly who qualifies or what the exact parameters are--it's something to do with whether an ordinary annuity for the amount of the employee's accumulated contributions & interest would pay more than the pension benefit under the ordinary calculation. But in practical terms you have to work well into your sixties plus have well over 30 years of service to get a pension payment more than 60% (i.e. 2% per year of service for 30 years). Your benefit will certainly not exceed 60% as an early retiree. Again, I am not complaining about this, but rather, questioning whether the assumptions underlying the comparison of public and private used in cliffp's calculation are typical of a broad range of public pension systems.

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My rule of thumb is that for the full pension plan where the employee contributes X% and the employer contributes y% of the employees salary, X+Y needs to be about 25% for 2%*years of service benefit. Typically what I have seen in public pension plans is that X is between 6-8% and Y is between 8-12%. Leaving a shortfall of 5-10%

I arrived at this rule of thumb, by assuming private sector worker contributed X and his employer Y in a 401k, his salary increased faster than inflation (merit/experience pay) . At retirement age, the lump sum was converted to a annuity, with a capped COLA increase, and with 50% survivor benefit for the same age spouse.

(I should add I invite others to check my calculation, which were performed under different under economic conditions. Relatively small changes in investment rates, inflation, and merit/experience pay calculation can make a big difference)
I haven't checked the calculation, because I'm skeptical that the assumptions about public pensions on which it is based. But I can tell you that in my pension system, until last year X=Y, that is the employee and employer contributions were equal. Up until three years ago (or maybe it was four), X+Y was just over 16%, which is in the range you assume for total contributions, and given our system's current condition, this is at least 5% less total contributions than required to bring the funding level to 100% within 30 years, according to a recent actuarial evaluation. But there's only a shortfall because we got hit so hard in the stock market crash. IIRC before that the actuaries said the contributions were adequate at the then combined total of 16.06% of salary. Contributions went up to just over 9% each from employee and employer in 2010 and just over 10% each last year. Because the pension system is significantly underfunded, the City increased its contribution last year to (IIRC) 11.25%. The employee contribution remained at 10.03%, which is the maximum allowed under our current contract. The rate used to calculate imputed interest on contributions was also changed from a fixed rate to one that changes with the rate on Treasuries. I wouldn't be surprised (or opposed) to see both sides of the contribution rise under the next contract. Meanwhile, as many other government entities have already done, Seattle is contemplating changing the pension offered to new hires to something considerably less generous than the current system. Since I've been telecommuting I haven't kept up with the details of any new proposal. Any such change would also, I think, have to be accepted by the union before it could be put into effect.

Quote:
As Ziggy nicely summarized this systematic underfunding of pension plans by 5-10% was always a problem, but since the economic crisis it has become a monster problem. There is no good solution to it.
Seattle's pension fund was ticking along pretty nicely until 2008, but lost over a quarter of its total assets in the stock market downturn and is now scarily underfunded with a largely baby-boomer workforce and, I suspect, more than a few employees who retired immediately after being laid off.

It wasn't systematic underfunding that put us in our current bind, it was the debacle on Wall Street, and there is no way for our system to recover its losses from the people who brought that fiasco to pass. Alas, there is no good solution to being caught in an economic tsunami, any more than there is to deliberate underfunding, mismanagement of pension fund assets, over-optimistic return assumptions, or any of the other ways pension funds can get into trouble.
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Old 12-04-2012, 12:59 AM   #19
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It annoys me to no end that people in the public sector want to blame the unions & the pension payouts for the problems WALL STREET (aka corporate America) created! Remember there will always be people "working the system" in private & the public sector!
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Old 12-04-2012, 04:36 AM   #20
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Seattle's pension fund was ticking along pretty nicely until 2008, but lost over a quarter of its total assets in the stock market downturn and is now scarily underfunded with a largely baby-boomer workforce and, I suspect, more than a few employees who retired immediately after being laid off.

It wasn't systematic underfunding that put us in our current bind, it was the debacle on Wall Street, and there is no way for our system to recover its losses from the people who brought that fiasco to pass. Alas, there is no good solution to being caught in an economic tsunami, any more than there is to deliberate underfunding, mismanagement of pension fund assets, over-optimistic return assumptions, or any of the other ways pension funds can get into trouble.
Just to clarify on what I meant on calculating pension benefit on 5 year highest vs final year, imagine Joe was making 50,000 five year, he got $1,500 cost of living raise each of the last five years and so he retired this year making $57,500. If his salary was based average of the last 5 years the pension would be based on a $54,500 vs $57,500 for a final year calculation. Of course not many worker private or public have received 3% wage boosts the last 5 years.

Honestly, it is a bit of convenient excuse to blame it on Wall St. First, most pension fund including IIRC, Seattle, use a five year smoothing function so that 2008 result will be fully recognized in 2013. Most forum members assets have fully recovered from the crash. (Although, I think mine are still a bit behind after figuring inflation.) If the professional pension managers haven't done as well as the folks on the forum....

I personally was concerned about state pension viability back around 2005. For a pretty simple reason. I had been reading financial forums like this for 5 years and I knew that if you wanted to withdraw 40K a year you near $1,000,000 in assets. But when a looked my state pension plan a lot of the new retirees we collecting $40,000 pension and yet when I looked at the assets there was only $400,000/retiree. Now obviously their big difference between $1,000,000 in assets supporting a SWR of 4% for individual and multi billion dollar pension funds, supporting the retirement of tens of thousand. Never the less I don't think a SWR of roughly 10% is every prudent.

When I dug a bit deeper one I found pretty consistent assumption in most pension plans, they almost all predicted a steady increase in the number of government employees, and wages for those employees. Which is great news for a pension plan more highly paid workers, makes easier to pay current retirees, meaning you can invest less. I can even understand how that occurs, I imagine all state and probably most major cities, have economic development department/forcasting. These department almost always are optimistic. But if you are the actuarial and are looking for economic forecast for you state or city, well who are you going to call, your economic development department.

Everything looked hunky dory in the mid 2000s, home prices were rising rapidly,new housing starts were up, the stock market was doing good, and new housing starts, means new people, who require more government workers.

Now we live in a new normal, and for pension funds the world is even worse. They don't have the freedom that folks like I do and cut my bond allocation down to 15%. Nope pension plans need roughly 50% of their money in bonds and right now bonds have a negative real return. So their options for raising more money to pay for the pensions are really limited hence the fighting.
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