Tackling the pension “transition” issue

Screen Shot 2012-05-09 at 12.18.45 PM.pngProposals for fundamental reform of public pension systems around the country frequently have run into one version or another of the same technical objection: closing the traditional system will somehow impose a steep “transition cost” on taxpayers. For example, the National Institute on Retirement Security, which is supported by public pension boards and the financial firms that work with them, issued a widely cited research report asserting that a move from defined-benefit (DB) to defined-contribution (DC) retirement plans would “increase costs to the employer/taxpayer at exactly the wrong time.”

The transition cost shibboleth is effectively demolished in a paper issued today by the Laura and John Arnold Foundation.
The paper’s author, University of Arkansas economist Robert M. Costrell, points out that the Government Accounting Standards Board (GASB) sets standards for financial reporting by pension funds but does not, in fact, determine pension funding levels. Moreover, Costrell points out, once governments close a DB plan to new entrants, GASB does not bar them from basing their amortization of unfunded accrued liabilities on total payrolls of both DB and DC plan members–and not just on shrinking DB payrolls alone.

Given the frequency with which alleged transition costs are invoked as a conversation-stopper by defenders of the pension status quo, Costrell’s paper is a potential game-changer in the reform debate.

As indicated by its title (“GASB Won’t Let Me” – A False Objection to Public Pension Reform) the Arnold Foundation paper focuses on the tendency of pension reform opponents co conflate accounting disclosures with funding policy imperatives. Costrell points out that GASB is in the process of revising the pension accounting rules, known as “statements,” that have been incorrectly cited as grounds for the argument that closing a DB plan requires an acceleration of catch-up payments to close existing liabilities. New GASB pension rules could change the existing annual required contribution (ARC) standard — which, he argues, “should put an end to the false claim that GASB poses an obstacle to pension reform.”

From the wrap-up of Costrell’s paper:

The issue of pension reform concerns the structure of future retirement benefits. This is entirely distinct from the funding schedule for amortizing the [unfunded accrued liability] – a financial policy decision on past obligations. The amortization decision is not altogether different from a state’s decision on scheduling payments on ordinary debt. States have generally proven capable of responsibly scheduling debt service, sometimes with the guidance of the rating agencies. As GASB cedes the corresponding role it involuntarily played in pension funding policy, the states will be obliged to take responsibility for sound amortization scheduling, as they do for other forms of debt.

Pension reform is a separate issue from amortization. These two issues have been conflated by those invoking the GASB proviso for closed DB plans, but this has only sown confusion. This is clearly demonstrated when the reform is structured with amortization payments on total payroll. In this way, the growth in the base for amortization payments is unaffected by the reform, so there is no policy reason for changing the schedule of these payments. If that schedule were previously considered prudent, then it should be continued; if it were previously considered imprudent, then it should be accelerated anyway, with or without pension reform. The funding schedule for amortization is a red herring, irrelevant to the fundamental policy decision for pension reform. Amortization pays for past debts; pension reform lays a path toward a responsible future.

Comments (15) Add yours ↓
  1. Charles

    You can’t cut benefits without hurting someone. Only a liar would claim otherwise!

    May 10, 2012 Reply
  2. Tough Love

    Well stated, particularly the last sentence. I’ve often stated that the excessive richness of Public Sector Plan Design, not the funding structure, is the problem.

    ANY Plan, no matter how rich can conceptually be appropriately/fully funded …… you just need a steady inflow of huge contributions (and/or consistently high investment returns) to do so.

    The proper goal should be EQUAL Public and Private Sector “Total Compensation” (cash pay + pensions + benefits) in similar occupations or occupations with reasonably comparable risks and skill sets if not directly comparable. Greater Public Sector “Total Compensation” is unnecessary to attract and retain a qualified workforce and is unfair to Taxpayers who pay Public Sector salaries and all but 10-20% of their pension costs.

    While there have been many recent and competing studies of Public and Private Sector “cash pay”, most conclude that it is quite close. This being the case, to avoid greater Public Sector “Total Compensation”, there is no need nor justification for greater pensions and better benefits. However, unless you are in extreme denial (as many Public Sector workers … encouraged by the Unions … seem to be), it’s not difficult to demonstrate that the taxpayer paid-for share of Public Sector Pensions are ROUTINELY 2, 4, (even 6 times for safety workers) greater in value at retirement than the pensions typically afforded Private Sector workers retiring at the SAME age, with the SAME years of service, and with the SAME cash pay.

    It has often been said that the first step in climbing out of a hole (a “financial” hole in the case of many city, county, and State Pension Plans) is to STOP DIGGING. Every day, the CURRENT pension formulas in place keep digging this hole deeper and deeper.

    There is no question that pension reform, which must include significant (50+%) reductions in the accrual rate (remembering that Current Public Sector pensions are 2+ times greater than their Private Sector counterparts), must not only apply to NEW employees, but to the FUTURE service of CURRENT employees.

    While such FUTURE service reductions in the pension accrual rate (e.g., from 2% to 1% per year of service) are both LEGAL and ROUTINELY done in Private Sector pension Plans, a variety of questionable legal roadblocks (Constitutional, property rights, contract law) make similar changes in Public Sector Plans MUCH more difficult. Of course, many of these roadblocks have been put in place via pressure on legislators and judges (who are conflicted by their participation in similar Public Sector Plans) by the Public Sector workers and their Unions.

    Private Sector Taxpayers need to challenge these roadblocks, as continuing on the current path will inevitably result in higher and higher taxes, and lesser and lesser service …… all to unnecessarily enrich Public Sector workers. If the barriers and resistance becomes insurmountable, Private Sector Taxpayers must demand a huge increase in the OUTSOURCING of Public Sector jobs, When the job ends, the burden of additional pension accrual ends with it.

    May 10, 2012 Reply
  3. Charles

    You can’t cut benefits without hurting someone. Only a liar would claim otherwise!

    May 10, 2012 Reply
  4. Charles

    TL

    If pay and benefits are cut, the quality of new employees will go down, especially as the economy improves. Take your pick.

    May 10, 2012 Reply
  5. marcia fritz

    We compared private sector and public sector wages and benefits for comparable jobs (the study is on our website http://www.fixpensionsfirst.com) Public sector wages in California are comparable to similar jobs in the private sector, but retirement benefits are three times higher. There is a small transition cost in providing new employees a defined contribution plan instead of a defined benefit plan if they plan on working just a few years for that public employer. In the private sector, employees leave and take their employers’ matching defined contribution $. But in the public sector workers who leave can’t take their employers’ contributions to a defined benefit plan until retirement, and only in monthly checks. Public sector workers tend to stick around, though, so the extra costs are minimal.

    May 10, 2012 Reply
  6. Tough Love

    Well stated, particularly the last sentence. I’ve often stated that the excessive richness of Public Sector Plan Design, not the funding structure, is the problem.

    ANY Plan, no matter how rich can conceptually be appropriately/fully funded …… you just need a steady inflow of huge contributions (and/or consistently high investment returns) to do so.

    The proper goal should be EQUAL Public and Private Sector “Total Compensation” (cash pay + pensions + benefits) in similar occupations or occupations with reasonably comparable risks and skill sets if not directly comparable. Greater Public Sector “Total Compensation” is unnecessary to attract and retain a qualified workforce and is unfair to Taxpayers who pay Public Sector salaries and all but 10-20% of their pension costs.

    While there have been many recent and competing studies of Public and Private Sector “cash pay”, most conclude that it is quite close. This being the case, to avoid greater Public Sector “Total Compensation”, there is no need nor justification for greater pensions and better benefits. However, unless you are in extreme denial (as many Public Sector workers … encouraged by the Unions … seem to be), it’s not difficult to demonstrate that the taxpayer paid-for share of Public Sector Pensions are ROUTINELY 2, 4, (even 6 times for safety workers) greater in value at retirement than the pensions typically afforded Private Sector workers retiring at the SAME age, with the SAME years of service, and with the SAME cash pay.

    It has often been said that the first step in climbing out of a hole (a “financial” hole in the case of many city, county, and State Pension Plans) is to STOP DIGGING. Every day, the CURRENT pension formulas in place keep digging this hole deeper and deeper.

    There is no question that pension reform, which must include significant (50+%) reductions in the accrual rate (remembering that Current Public Sector pensions are 2+ times greater than their Private Sector counterparts), must not only apply to NEW employees, but to the FUTURE service of CURRENT employees.

    While such FUTURE service reductions in the pension accrual rate (e.g., from 2% to 1% per year of service) are both LEGAL and ROUTINELY done in Private Sector pension Plans, a variety of questionable legal roadblocks (Constitutional, property rights, contract law) make similar changes in Public Sector Plans MUCH more difficult. Of course, many of these roadblocks have been put in place via pressure on legislators and judges (who are conflicted by their participation in similar Public Sector Plans) by the Public Sector workers and their Unions.

    Private Sector Taxpayers need to challenge these roadblocks, as continuing on the current path will inevitably result in higher and higher taxes, and lesser and lesser service …… all to unnecessarily enrich Public Sector workers. If the barriers and resistance becomes insurmountable, Private Sector Taxpayers must demand a huge increase in the OUTSOURCING of Public Sector jobs, When the job ends, the burden of additional pension accrual ends with it.

    May 10, 2012 Reply
  7. Zachary Janowski

    Zachary Janowski

    Officials in Connecticut have made this argument, that somehow it’s more expensive to get rid of the pensions because you lose out on the employee contributions. If the employees were paying most of the costs, then we wouldn’t be having this conversation.

    May 10, 2012 Reply
  8. Tough Love

    Marcia, If you recall, 2+ years back we traded quite a few comments, where I strongly argued that any substantive pension reform needed to include pension formula accrual rate reductions for FUTURE service for CURRENT workers. At that time your “official” position did not call for such reductions, but in a later comment-trade, you subtly suggested that you were not personally against such reform, but that it was too big a “first step”. Oh how things have changed since those discussions …….

    Which leads me to your support for Public Sector workers paying for HALF the cost of their pensions. While this would indeed be a major leap forward, (1) “half” is not really the right amount, and (2) the mechanics of implementing such a change without loopholes dampening it’s effectiveness is fraught with difficulties.

    With respect to (1) above ….. as I stated in my comment above, the proper goal should be EQUAL Public and Private Sector “Total Compensation” (cash pay + pensions + benefits) in similar occupations or occupations with reasonably comparable risks and skill sets if not directly comparable. And with equal “cash pay” in the Public and Private Sectors, what’s needed re pensions is for the Taxpayer’s contribution towards Public Sector pensions to be roughly equal to (but not greater) than what typical Private Sector employers contribute towards THEIR employees’ retirement programs.

    By far, the most common retirement program in the private sector is a 401K Plan with an employer match of typically 2-4%. Even if you add in the employer’s FICA contribution of 6.4% the total is RARELY more than 10%. This should also be the upper limit of Taxpayer contribution towards Public Sector worker pensions. Using this upper limit of 10% suggests that the TOTAL Pension Plan cost (expressed as a level annual % of pay) can be no greater than 2×10%=20%, to be shared equally between the workers and the Taxpayers.

    But, because of the richness of Public Sector plan formulas, the very early full retirement ages, the inclusion of COLAs, the very “liberal” definition of “pensionable compensation”, the inclusion of overtime (and sometimes “allowances” and unused sick day payouts) in pensionable compensation, etc., even the lower level pensions afforded “miscellaneous employees” require (total) level annual contributions greater than 20%. In fact, the richest safety-worker Plans can have level annual costs approaching 60% of pay if the Plan’s cost is to appropriately be fully funded during the working career of that employee. Under such a Plan, are you suggesting that it’s fair for Taxpayers to pay half of the 60% or 30% of pay … which is likely 3 time greater than what they get from their employers?

    The proper cap on Taxpayer contributions should be near the upper limit of what the Taxpayers similarly get from their employers … with that upper limit often considerably LESS than HALF total Plan costs. I believe one State (UTAH ?) recently implemented a 15% contribution cap, but I’m not familiar with the details …. although the concept of a fixed Taxpayer “CAP” on a Traditional DB Plans certainly raises funding issues when assets decline (especially with respect to fairness between actives and retirees).

    With respect to (2) above (the mechanics of a pay-half arrangement and the avoidance of loopholes) …. assuming the employees agreed to pay “half” of total Plan costs, they would have an enormous incentive to minimize the true costs of promised benefits. For example, they would argue for shorter rather than longer life expectancy assumptions, and would support discounting Plan liabilities with the highest possible interest rate. Given the politics, it’s hard to believe they would not be successful in at least some of these endeavors …. leading to emerging underfunded liabilities. When that happens, who pays ? Supposedly the workers should pay for half of those underfunded liabilities as they emerge, but does the new retiree escape paying for his/her share? If so who picks it up?

    Get the picture?

    We seem to be trying to back-door our way into a cap on Taxpayer contributions but in a VERY convoluted and problematic way. What we really need, is to bite-the-bullet and finally recognize that we need to freeze these DB Plans and switch to either a DC Plan or (if that’s not possible) to the Cash Balance version of a DB Plan.

    May 10, 2012 Reply
  9. Charles

    TL

    If pay and benefits are cut, the quality of new employees will go down, especially as the economy improves. Take your pick.

    May 10, 2012 Reply
  10. marcia fritz

    We compared private sector and public sector wages and benefits for comparable jobs (the study is on our website http://www.fixpensionsfirst.com) Public sector wages in California are comparable to similar jobs in the private sector, but retirement benefits are three times higher. There is a small transition cost in providing new employees a defined contribution plan instead of a defined benefit plan if they plan on working just a few years for that public employer. In the private sector, employees leave and take their employers’ matching defined contribution $. But in the public sector workers who leave can’t take their employers’ contributions to a defined benefit plan until retirement, and only in monthly checks. Public sector workers tend to stick around, though, so the extra costs are minimal.

    May 10, 2012 Reply
  11. Tough Love

    Charles, Starting from the position that we currently overcompensate Public Sector workers (vs. their Private Sector counterparts, and primarily via much greater pensions and better benefits, rather than greater cash pay), yes, you are likely correct that some who elect to work in the Public Sector (for that compensation advantage) would likely chose to work in the Private Sector if that advantage did not exist. And yes, SOME of that group might be better qualified.

    However, we need to balance the potential disadvantage (of not hiring these more qualified candidates if Public Sector pay was not higher) against 2 things …(1) are we getting sufficient value (in terms of much better qualified employees) for the extra cost, and (2) the higher Public Sector compensation (and ESPECIALLY when delivered in back-loaded pensions) leads to VERY low “quit rates” and a great deal of dead-wood hanging around LONG after their productivity has dwindled.

    While it is difficult is determine if the compensation differential buys sufficient added value, I would wager that it does not because of the VERY substantial additional costs of the VERY rich Public Sector pensions.

    And, I believe the LONG-TERM wasted cost of the “dead-wood” that hangs around LONG after their prime, just for the job security and to get the pension is HUGE, and a MUCH larger NEGATIVE than is the POSITIVE of potentially hiring higher quality candidates via overcompensation.

    May 10, 2012 Reply
  12. Zachary Janowski

    Zachary Janowski

    Officials in Connecticut have made this argument, that somehow it’s more expensive to get rid of the pensions because you lose out on the employee contributions. If the employees were paying most of the costs, then we wouldn’t be having this conversation.

    May 10, 2012 Reply
  13. Tough Love

    Marcia, If you recall, 2+ years back we traded quite a few comments, where I strongly argued that any substantive pension reform needed to include pension formula accrual rate reductions for FUTURE service for CURRENT workers. At that time your “official” position did not call for such reductions, but in a later comment-trade, you subtly suggested that you were not personally against such reform, but that it was too big a “first step”. Oh how things have changed since those discussions …….

    Which leads me to your support for Public Sector workers paying for HALF the cost of their pensions. While this would indeed be a major leap forward, (1) “half” is not really the right amount, and (2) the mechanics of implementing such a change without loopholes dampening it’s effectiveness is fraught with difficulties.

    With respect to (1) above ….. as I stated in my comment above, the proper goal should be EQUAL Public and Private Sector “Total Compensation” (cash pay + pensions + benefits) in similar occupations or occupations with reasonably comparable risks and skill sets if not directly comparable. And with equal “cash pay” in the Public and Private Sectors, what’s needed re pensions is for the Taxpayer’s contribution towards Public Sector pensions to be roughly equal to (but not greater) than what typical Private Sector employers contribute towards THEIR employees’ retirement programs.

    By far, the most common retirement program in the private sector is a 401K Plan with an employer match of typically 2-4%. Even if you add in the employer’s FICA contribution of 6.4% the total is RARELY more than 10%. This should also be the upper limit of Taxpayer contribution towards Public Sector worker pensions. Using this upper limit of 10% suggests that the TOTAL Pension Plan cost (expressed as a level annual % of pay) can be no greater than 2×10%=20%, to be shared equally between the workers and the Taxpayers.

    But, because of the richness of Public Sector plan formulas, the very early full retirement ages, the inclusion of COLAs, the very “liberal” definition of “pensionable compensation”, the inclusion of overtime (and sometimes “allowances” and unused sick day payouts) in pensionable compensation, etc., even the lower level pensions afforded “miscellaneous employees” require (total) level annual contributions greater than 20%. In fact, the richest safety-worker Plans can have level annual costs approaching 60% of pay if the Plan’s cost is to appropriately be fully funded during the working career of that employee. Under such a Plan, are you suggesting that it’s fair for Taxpayers to pay half of the 60% or 30% of pay … which is likely 3 time greater than what they get from their employers?

    The proper cap on Taxpayer contributions should be near the upper limit of what the Taxpayers similarly get from their employers … with that upper limit often considerably LESS than HALF total Plan costs. I believe one State (UTAH ?) recently implemented a 15% contribution cap, but I’m not familiar with the details …. although the concept of a fixed Taxpayer “CAP” on a Traditional DB Plans certainly raises funding issues when assets decline (especially with respect to fairness between actives and retirees).

    With respect to (2) above (the mechanics of a pay-half arrangement and the avoidance of loopholes) …. assuming the employees agreed to pay “half” of total Plan costs, they would have an enormous incentive to minimize the true costs of promised benefits. For example, they would argue for shorter rather than longer life expectancy assumptions, and would support discounting Plan liabilities with the highest possible interest rate. Given the politics, it’s hard to believe they would not be successful in at least some of these endeavors …. leading to emerging underfunded liabilities. When that happens, who pays ? Supposedly the workers should pay for half of those underfunded liabilities as they emerge, but does the new retiree escape paying for his/her share? If so who picks it up?

    Get the picture?

    We seem to be trying to back-door our way into a cap on Taxpayer contributions but in a VERY convoluted and problematic way. What we really need, is to bite-the-bullet and finally recognize that we need to freeze these DB Plans and switch to either a DC Plan or (if that’s not possible) to the Cash Balance version of a DB Plan.

    May 10, 2012 Reply
  14. Tough Love

    Charles, Starting from the position that we currently overcompensate Public Sector workers (vs. their Private Sector counterparts, and primarily via much greater pensions and better benefits, rather than greater cash pay), yes, you are likely correct that some who elect to work in the Public Sector (for that compensation advantage) would likely chose to work in the Private Sector if that advantage did not exist. And yes, SOME of that group might be better qualified.

    However, we need to balance the potential disadvantage (of not hiring these more qualified candidates if Public Sector pay was not higher) against 2 things …(1) are we getting sufficient value (in terms of much better qualified employees) for the extra cost, and (2) the higher Public Sector compensation (and ESPECIALLY when delivered in back-loaded pensions) leads to VERY low “quit rates” and a great deal of dead-wood hanging around LONG after their productivity has dwindled.

    While it is difficult is determine if the compensation differential buys sufficient added value, I would wager that it does not because of the VERY substantial additional costs of the VERY rich Public Sector pensions.

    And, I believe the LONG-TERM wasted cost of the “dead-wood” that hangs around LONG after their prime, just for the job security and to get the pension is HUGE, and a MUCH larger NEGATIVE than is the POSITIVE of potentially hiring higher quality candidates via overcompensation.

    May 10, 2012 Reply
  15. Frank Keegan

    Take a look at the Arnold study, the House Joint Economic Committee report, and Rahm Emanuel’s Roadmap to Retirement Security to see signs of hope that the message is getting through.
    http://www.statebudgetsolutions.org/blog/detail/commentary-municipal-state-pension-reform-message-gaining-momentum
    —–

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    TITLE: fAke oAkley Antix
    URL: http://www.undp.org.ph/jobs/Oakley-Antix.php
    IP: 198.2.203.16
    BLOG NAME: fAke oAkley Antix
    DATE: 07/25/2013 12:13:42 PM
    Downloading data from this web page is as simple |as clicking the mouse rather than other blogs which transfer me here and there on the webpages.

    May 17, 2012 Reply

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