Honolulu is building a $275 million (before cost overrun system) light rail, I guess they figure with a pension fund that is in worse shape than Seattle's why not go for broke.
It is hard to make concrete suggestion in these situations, and I have no idea how 1/2 retirement would work but it is seems reasonable.
I can't figure it out either. I guess I will just have to put it in the suggestion box and let the actuaries determine whether it would help or not.
The current system has some restriction on paying future COLA based on the pension funding level, that is a nice start but probably not conservative enough and also should be linked to the credit rating of the city.
IMO, the "Floor COLA" ordinance needs to be completely rethought, if not repealed. I don't think the original pension system had any kind of cost of living adjustment. The first ordinance I could find that established a COLA was in 1994. The full text of that ordinance isn't available online so I don't know what the provisions were. Next, there was a revision in 1997, providing a one-time bonus to bring the benefit up to 40% of its original purchasing power, followed in 1998 by a fixed percentage adjustment based on how long the recipient had been retired but with 60% floor, then changing in 2001 to a 1.5% annual adjustment with a 60% floor, and a trigger to raise the floor to 65%. I'm a bit confused here, because there are two ordinances close together in time. I think the first one may have established a threshold to change from the 1998 system to 1.5% annual/60% floor and that threshold was reached almost immediately. Anyway, to me it looks like the legislation is written so every time the funding threshold is reached, the floor COLA is raised another 5 percentage points, and the ordinance revised to require the same increase next time the threshold is reached, which it did again toward the end of 2007 IIRC, so the floor is now 65% and the legislation requires an increase to 70% floor next time the 95% funding level is reached. Since the threshold is set at 95% funding, if this works the way I think it does, it will keep the pension fund in a perpetual state of not-quite-adequate funding, until the COLA reaches 100%. I agree with you that this should be more conservative. At an absolute minimum, the threshold should be 100% funding for the
increased benefit, not the existing benefit which I think is how it works as the ordinance currently stands. IMO it would be even better to require the funding level not just to reach 100% but to stay above full funding for some pre-determined length of time before considering an increase, and the automatic bump-up to a 70% floor next time we get to the threshold should be repealed. Not that that's going to happen any time soon—the funding level is still just below 65%.
I think linking to creditworthiness is a good idea, but IMO it should be the credit of the retirement system itself. It's a separate entity, and at least theoretically, the City could be bankrupt and the retirement system in great shape, or vice versa.
One thing I would consider making automatic, and that is a freeze on the "lump sum" options if funding sinks below some pre-determined level. One of the options available for retirees is to get a reduced pension benefit plus return of either half or all of employee contributions as a lump sum. I don't know how they do it, but you can get back all of your contributions, with interest, and still receive a monthly check for about 80% of the basic, unreduced benefit. The last thing I'd want in a bad economic situation like the current one is for a bunch of employees to retire and withdraw their contributions. I'd be afraid it could be the straw that broke the camel's back.
I'd change the pension benefits to the average of the last 5 or 10 years,this prevents spiking and would reduce overall pension benefits.
I don't know if the Seattle retirement system has any problem with "spiking". Unless there is, I don't think I'd change the number of years, and certainly not as high as ten.
Finally going forward I'd change the assumed retirement age to 65 not 62. If people want to retire before them fine but the benefits should be reduced in the same actuarial way that social security reduces benefits.
Retirement eligibility is not strictly based on age, it's a combination of age plus years of service. I know you can retire at any age if you have 30 years in, or at age 52 plus 20 years (guess why I know that
), and the older the retiree, the fewer years of employment are required for eligibility, although with only a few years of service you a small pension. I'm not sure changing the only the ages would do very much, because the maximum benefit is set at 60% of the average of two highest years salary, with 30 years of service. What I think would have a larger effect would be to increase the number of years of service needed for the maximum benefit, perhaps to 35, and adjust the benefits of people who retire before that accordingly, but I'm pretty certain that would require legislation to amend the section of the Municipal Code that controls the pension, which might be a difficult hurdle to get over. AFAIK that relationship of 30 years/60% was established when the pension fund was first set up in 1929.
It seems to me too, that the fund needs to have some very strict, very specific limits put on what it can invest in. No more gambling on "black box" hedge funds that won't tell you what they are going to do with the money. Someone said on one of these public pension threads that employee retirement funds could do as well or better with a good selection of index funds than with hedge funds and the like. I couldn't agree more! Keep it simple and keep it sound. I wonder if it would help eliminate those sort of temptations if the Retirement System Administrator's pay were tied to the performance of the fund. But I would make the basis of evaluation not "the more explosive the growth the more you get paid" but rather, "the greater percentage of the time you stay above 100% funding level, and the more stable the fund is, the more you get paid".
Lastly, whatever changes are to be made, I would phase them in gradually, over a period of at least five years. I hate the idea that new actuarial tables are going to be put into effect on such short notice. People who are close to retirement will have to choose whether to retire under the old version or the new, with very little time to think or prepare. I suspect that if the changes are significant, a lot of people who would otherwise have kept working (and contributing to the fund) for a few more years may retire right away to beat the deadline, which is just what we don't need at the moment. On top of that, everyone will almost certainly still be somewhat in the dark about health care—I doubt that any changes to the City's retiree health plan as a result of the recent bill will have been completely figured out by the end of this year.
