Alaska Public Pension Coalition

Goldman Sachs Supports Defined Benefit Pension Plans

Blackrock Supports Defined Benefit Pension Plans

New Public Sector Employees Overwhelmingly Select Pensions Over Individual Retirement Accounts; Pension Cost Efficiencies Cited as Key Advantage

A new study of the retirement plan choice in the public sector finds that defined benefit (DB) pensions are strongly preferred over 401(k)-type defined contribution (DC) individual accounts. The study analyzes seven state retirement systems that offer a choice between DB and DC plans to find that the DB uptake rate ranges from 98 to 75 percent. The percentage of new employees choosing DC plans ranges from 2 to 25 percent for the plans studied.

In recent years, a few states have offered public employees a choice between primary DB and DC plans. The new study, Decisions, Decisions: Retirement Plan Choices for Public Employees and Employers, analyzes the choices made by employees and finds that:

• When given the choice between a primary DB or DC plan, public employees overwhelmingly choose the DB pension plan.
• DB pensions are more cost efficient than DC accounts due to higher investment returns and longevity risk pooling.  
• DC accounts lack supplemental benefits such as death and disability protection. These can still be provided, but require extra contributions outside the DC plan which are therefore not deposited into the members' accounts.
• When states look at shifting from a DB pension to DC accounts, such a shift does not close funding shortfalls and can increase retirement costs.
• A "hybrid" plan for new employees in Utah provides a unique case study in that it has capped the pension funding risk to the employer and shifted risk to employees.

Source: Excerpted From National Institute on Retirement Security 10/5/2011

Sen. Bernie Sanders Moves to Protect Social Security from Budget Slashers

Sen. Bernie Sanders (I-Vt.) said last week that he will introduce legislation that would expand the reach of the payroll tax, as part of an effort to give further support to Social Security. According to The Hill, Sanders is proposing to make individual income higher than $250,000 per year subject to the payroll tax — an idea he says he is lifting from President Obama’s 2008 campaign for the White House. As it stands, the payroll tax, which funds Social Security, applies to the first $106,800 of annual income; the Sanders bill would not impose the payroll tax on income between that level and $250,000. In a recent news release, the senator said he was also worried that the new Super Committee tasked with finding additional ways to reduce the deficit will try to find savings through cuts to Social Security. One method that has already been discussed would involve switching to the so-called “chained CPI,” an alternate form of inflation that would lead to a slower increase in Social Security benefits.  “Social Security did not cause federal budget deficits, and should not be part of the Super Committee’s solution to the debt problem,” said Barbara J. Easterling, President of the Alliance. According to Sanders’ office, the chief actuary for Social Security says the senator’s proposal to make the payroll tax applicable at higher income levels would create enough new revenue to keep the program solvent for the next 75 years.

[Excerpted from the Friday Alert from the Alliance for Retired Americans]

Four Little-Understood Points on State Pension Problems

Fixing underfunded state and local pension programs is a long-term goal that most states can accomplish with moderate, common-sense steps. A major report released from the Center on Budget Policy and Priorities outlines those steps. Here are highlights from the report:

Today’s pension shortfalls were caused in substantial part by the 2001 recession and the recent Great Recession.

Fully funding pension shortfalls immediately would be both difficult and unnecessary.

Many states and localities are already taking steps to improve pension funding.

States and localities can strengthen their pensions without causing large problems for other parts of their budgets or their economies while the economies remain weak.

[Read the full report: A Common-Sense Strategy for Fixing State Pension Problems in Tough Economic Times.]

The Origins and Severity of the Public Pension Crisis

With many state governments facing budget shortfalls this year along with dwindling federal assistance, some policy-makers have begun to call for drastic reductions of public sector pensions as a way to ease state budget woes. A report from the Center for Economic and Policy Research puts this issue into better perspective, clearing up many common misconceptions about these funds.

The report, “The Origins and Severity of the Public Pension Crisis,” shows that the main reason public pension shortfalls exist at all is the downturn in the stock market following the housing crash in 2007-2009, not inadequate contributions. The paper demonstrates that if pension funds had just earned returns equal to the interest rate on 30-year Treasury bonds since 2007, their assets would be more than $850 billion greater than they are today.

Download the full report: The Origins and Severity of the Public Pension Crisis.

Can State and Local Pensions Muddle Through?

The Center for Retirement Research at Boston College released an Issue in Brief: Can State and Local Pensions Muddle Through?  

The key findings include:

1) The market crash has hurt public pensions, and quick fixes aren’t feasible because:

• pension cuts for new hires take time to add up; and
• tax revenues have been hit hard by the recession.

2) Fortunately, most plans do not face a liquidity crisis.

3) Years to exhaustion depend on investment returns and concept.  With 8 percent returns, most plans have:  

• at least 15 years under “termination” concept.
• at least 30 years under “ongoing” concept.

4) Notable exceptions include Connecticut SERS, Illinois SERS, Illinois Universities, Kentucky ERS, Louisiana Teachers, New York City Teachers, and Rhode Island ERS.

View the full report: Can State and Local Pensions Muddle Through?

Center for Economic and Policy Research - Pension Return Calculator

“Most pension funds assume a 10 percent rate of return, the historical average,” said Dean Baker, a co-director of Center for Economic and Policy Research (CEPR). “There are practically no plausible scenarios in which stocks will only produce a 4.5 percent rate of return, especially when one considers our current low price-to-earnings ratios.”

“The Pension Return Calculator” allows users to manipulate several variables --including nominal rates of return on stocks and GDP growth-- to show price-to-earnings ratios from 1962-2050 in an attempt to achieve a risk-free, 4.5 percent rate of return.

The calculator demonstrates that attempts to scale back public pensions based on pessimistic expectations of rates of return are misguided. Barring another downturn of the magnitude of the Great Recession, it is highly unlikely that the rate of returns on public pensions will not be near the historic average.

[Excerpted from the Center for Economic and Policy Research. Access CEPR's Pension Return Calculator here.]

What you need to know about state pension systems

Before understanding what may or may not happen to state pension funds, and what can or cannot be done about it, we must understand the main contributor to the current funding problem facing public pension funds. According to the Center for Economic and Policy Research, most of the pension shortfall is attributable to the plunge in the stock market in the years 2007-2009. The full analysis covering the impact and future projections of pension can be accessed from The Washington Post.

[Retrieved from The Washington Post on March 3, 2011.]

 

 

 

New Research Brief Finds Private Sector Pensions Regulated to Death

Private sector companies have trended away from offering pensions because of an onerous regulatory environment. Since the 1970s, laws and regulations have created funding volatility for companies sponsoring pensions, rather than facilitating predictable costs that enable companies to effectively manage cash flow.

A wide body of research has focused on the numbers of companies trending away from pensions, yet substantially less attention has focused on the specific reasons why. In 2005 only 33% of private sector employees with workplace retirement plans had pensions, yet coverage was at 85% in 1975.

The research brief accessed from the National Institute on Retirement Security on March 5, 2011 examines the root causes behind the trend.