State Pension Fund Solution?

[rhartford]

My knowledge of pension fund issues is minimal, but I would value your thoughts on the following:

Take the current state pension fund assets and distribute them into individual 401 k plans to eligible state employees. If the taxpayers allowed those pension funds to be “underfunded” so be it. The distribution would be in accord with current assets and distributed into employee 401 k plans based on appropriate formulas.

Advantages: Money will not be taken from future taxes to compensate for “underfunding.” Politicians would no longer have pension fund assets to manipulate. Current employees would get something now without fear of future taxpayer rebellions. Any future state “contributions” to employee plans would be paid out of the current year operating expenses. The immorality of passing underfunded liabilities on to the next generation would end. Politicians could not buy votes by granting benefits while promising to take assets from taxpayers in the future; the takings would occur only in the current year.

Disadvantages: The political and legal hassles and challenges to the process and to the distribution formulas.

[merjet]

Pension Funds Strained, States Look at 401(k) Plans in yesterday's New York Times.

[algernonsidney]

Government employees often have some of the most generous pensions around. I know that Ohio teachers do not even have to pay into Anti-Social Insecurity. They keep more money and still have a good one when they retire. Some states also offer generous pensions in order to get rid of "bad" "old" teachers.

[Reidy]

It's a good idea, but you'd better be prepared for the political opposition that will arise when government employees see that the funded part of their pension (the part you propose to distribute to 401K plans) will pay for only a fraction of what they've been promised. As with similar suggestions for Social Security (Bush proposed something like this, but it went nowhere politically, even in a Republican congress), the best way to sell such a measure would be to install it for younger workers and pay older workers, out of tax revenues, what they thought they were going to get.

[merjet]

It's a good idea, but you'd better be prepared for the political opposition that will arise when government employees see that the funded part of their pension (the part you propose to distribute to 401K plans) will pay for only a fraction of what they've been promised. As with similar suggestions for Social Security (Bush proposed something like this, but it went nowhere politically, even in a Republican congress), the best way to sell such a measure would be to install it for younger workers and pay older workers, out of tax revenues, what they thought they were going to get.

Put IOU's in their 401(k) accounts, signed by the governor and legislators. That's what the pension promises were/are.

More seriously, the post-retirement medical benefits promised is another big problem.

[rhartford]

Pension Funds Strained, States Look at 401(k) Plans in yesterday's New York Times.

Thanks for the informative link, Merlin.

The quotation below from the linked article indicates the difficulty of ending defined benefit pension plans with conversion to 401(k)-type plans. Besides being treated as a Ponzi scheme, as implied by the second paragraph, it also seems possible to me that the value of private workers 401(k) plans will be eroded away by inflation, while government-worker defined benefit plans will be relatively unscathed. This is another good reason to get us all in the same boat by converting the government defined benefit plans to 401(k)-type plans, even though it will be politically difficult. Then we will all have a vested interest in responsible government monetary policy.

“Unlike private companies, most states are constitutionally or contractually barred from changing the pension plans of current employees without their consent. So the new rules are generally voluntary or apply only to new employees.

In fact, switching workers to 401(k)-type plans can make the underfunding problem even worse. As contributions move to individual investment accounts, less money goes into the traditional plan to help finance pensions promised to other workers.”

[Selene]

Here in NJ, Christie started forcing changes last year when N.J. Gov. Chris Christie signed pension, benefits changes for state employees:

"The new laws ban future part-time workers from the pension system, instead requiring part-timers who make more than $5,000 to join a 401(k)-style plan. It also makes pensions for future hires less generous, rolling back a 9 percent increase granted in 2001, requires pension payments to be based on one job, and limits payments of accrued sick leave for future workers to $15,000. The bills do not affect those already retired."

The National Conference of State Legislatures reported last summer that Lawmakers had spent the past five years shoring up public retirement plans.

"There are a few state models. Nebraska had a defined contribution plan for state employees between 1967 and 2002, when it changed it to a cash-balance plan to provide better investment returns for members. West Virginia began enrolling teachers in a defined contribution plan in 1990. It was replaced with a traditional defined benefit plan in 2005, again because members were experiencing such small investment growth that they would be poorly prepared for retirement. Michigan started placing state employees in a defined contribution plan in 1997. A few states offer both a defined contribution plan and a defined benefit plan for all members. In the 1990s, other states began offering defined contribution plans as an option employees—and in rare instances, teachers—could choose. But the general practice in state and local government is unchanged: 91 percent of full-time state and local government employees are covered by a traditional, defined benefit retirement plan. The funding for those plans reached an historic high in 2001 when 31 of the 73 statewide funds that use the most widespread form of accounting method reported assets that were more than 100 percent of their accrued liabilities—the amount they eventually would have to pay beneficiaries. Another 18 reported assets between 90 percent and 100 percent of accrued liabilities. Since experts advise a ratio of 80 percent, these were impressive.

It’s unlikely those kind of ratios will be seen again soon. Sixteen of the 31 states that had broken the 100 percent line in 2001 reported ratios above 80 percent in 2009. Only the Delaware Retirement System was close to 100 percent. Two other plans in Indiana and North Carolina were also above 90 percent."

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One key part of any pension planning that we would reccommend to workers in NY City or State government back in the '80's was to buy a high-low pension planning insurance policy because when the individual was to approach retirement, they would have to declare an option to take a pure annuity payout or a spousal "survivership" option.

This "option" was to provide for your spouse if you predeceased him or her. The math was pretty simple. To max your annuity at retirement, you should have bought your life insurance when you were young and the premiums were fixed. Then you would take your full annuity at retirement because the survivor option was simply buying life insurance at a time when your rates were much higher due to age and might be severely rated because of health.

I wonder what type of pension planning you could even consider today if you were thirty years old.

Sad situation now exists with complete uncertainty.

Way to go government!

Adam