Pennsylvania Gov. Tom Wolf sat down with PennLive this week to discuss the state’s pension system.
The first topic of discussion is a possible transition to a 401(k) system – an option favored by the state’s Republican lawmaker but opposed by Wolf.
Wolf also discusses the long-term funding of the system and comments on the state making its full actuarially required contribution.
Video Credit: PennLive
Last month, the Military Compensation and Retirement Modernization Commission released a long-awaited report containing a series of policy proposals designed to decrease the cost of military benefits, including retirement benefits.
One of the more controversial proposals: the phase-out of the military’s current defined-benefit plan in favor of a hybrid plan that features characteristics of a 401(k).
[Proposal details can be read here.]
Now, the Pentagon is digging deeper into the report, and officials are asking for access to the data that was used to form the proposals.
From the Military Times:
“[The commission] claims they’ve done all the analysis but we have not been able to see what’s inside that analysis, so I’m anxious to see it . … We are interested in looking at how the commission came to the conclusion that [its proposed retirement recommendations] would be a better option,” [Defense Department Chief of Naval Personnel Vice Adm. Bill] Moran said.
Military officials are receptive to the idea, Moran said, noting that the Defense Department last year offered its own proposal for military retirement reform that includes some similar features.
Still, Moran said he’d like more information about the commission’s claim that troops would prefer the proposed system and it would not affect retention.
“There are aspects we like and aspects we need more analysis on,” Moran said.
Top personnel officials have been working around the clock to analyze the controversial proposals.
Why is the Pentagon examining the proposals so closely?
The Pentagon’s official view of the report will hold sway on Capitol Hill when it comes time for lawmakers to vote on the proposals.
Photo by Brian Schlumbohm/Fort Wainwright PAO
Public employee groups, businesses and lawmakers all hotly debated a Nevada bill this week that would make major changes to the state’s pension system.
The measure under scrutiny is Assembly Bill 190, which would close off the state’s defined-benefit system and funnel all new government hires into a hybrid plan that more closely resembles a 401(k).
The bill was proposed in late February by Assemblyman Randy Kirner [R].
More on how the pension system would look under the bill, from the Review-Journal:
Kirner said there would still be a defined benefit element to the plan worth 6 percent of an employee’s salary that would be paid by the public agency. This piece of the plan is intended to account for the fact that Nevada public employees do not pay into Social Security, he said.
The remainder of the retirement plan would be a defined contribution plan, with 6 percent being provided by the state or local government agency and another 6 percent coming from the employee.
For police and fire, the defined contribution rate would be 9 percent each from the employer and employee.
At the hearing this week, state businesses were supportive of the measure.
But public employee groups argued against the bill, saying the changes would make it harder to recruit talented workers.
Tina Leiss, a top official at the Nevada Public Employee Retirement Systems, also spoke against the bill.
The bill is still in committee. Read the text of the bill here.
Photo credit: “Flag-map of Nevada” by Darwinek – self-made using Image:Flag of Nevada.svg and Image:USA Nevada location map.svg. Licensed under CC BY-SA 3.0 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Flag-map_of_Nevada.svg#mediaviewer/File:Flag-map_of_Nevada.svg
Last month, the Military Compensation and Retirement Modernization Commission produced a report that recommended a series of changes to the military’s retirement benefit system.
Among the proposals: shrinking retirement pay by about 20 percent, and phasing out the military’s current defined-benefit plan, in favor of a hybrid plan that features characteristics of a 401(k).
Another proposal however, would make benefits richer for long-time military members.
But Congress remained skeptical on Wednesday. From the Military Times:
Some lawmakers questioned the piece of the new retirement system that would offer troops a lump-sum “continuation pay” at 12 years of service. The commission’s data claiming that career troops would accrue more total benefits under the proposed system assumes that individual troops invest that money into their personnel retirement account and not touch it until age 59 and a half.
Rep. Susan Davis, D-Calif., doubted that all troops will make that decision.
“What if that assumption doesn’t bear out?” she said. “Is the whole program impacted if they don’t do that? Does it rest on that assumption?”
[…]
Rep. Joe Heck, R-Nev., chairman of the personnel panel of the House Armed Services committee, who is also a trained physician, raised concerns about the commission’s claim that Tricare is reimbursing doctors at rates lower than government-run Medicare and fair-market value.
“As a health-care provider for over 30 years, I question that assumption,” Heck said.
Military compensation is a controversial area for cuts, so it’s unclear if the political will exists to move forward with any of the commission’s proposals.
However, John McCain said last month he was open to reforming the military’s retirement system. From Military.com:
Sen. John McCain, chairman of the Senate Armed Services Committee, took the opposite position, saying he was open to possible changes in pay and benefits.
“I can probably support a number of changes that need to be made,” McCain said without giving specifics. He singled out the military health care system, which he said “has to be reformed.”
Read more on the proposed changes here.
Photo by Brian Schlumbohm/Fort Wainwright PAO
When Illinois Governor Bruce Rauner was on the campaign trail, he touted his preferred solution to the state’s pension problems: shifting new hires into a system that more resembled a 401(k) plan than a traditional pension.
The idea is commonplace and has been incorporated into dozens of state and local pension plans across the country.
Michael T. Carrigan, president of the Illinois AFL-CIO, has penned a piece lambasting the idea that 401(k)s should replace traditional pensions.
From the piece:
It’s not just basic finance, it’s common sense: A large pool of money invested by professionals will yield far greater returns than small, separate accounts managed by individuals with no professional training in finance.
So why do some think that ending Illinois’ defined benefit pension system and moving workers into privatized, 401(k)-style accounts is a good idea?
[…]
New data from the National Institute for Retirement Security shows just how much Illinois taxpayers stand to lose if we switch to privatized accounts. To provide workers with the same modest retirement benefits, traditional pensions are 48 percent less expensive than 401(k)-style plans. That’s a 48 percent savings to Illinois taxpayers.
According to NIRS, there are a few key reasons why defined benefit pensions are more cost effective:
– Pension plans enjoy higher investment returns and lower fees than individual accounts, generating a 27 percent cost savings.
– Unlike individual investors who generally enjoy high-risk, high-reward investment strategies when they’re young but switch to lower-risk portfolios that yield far lower returns as they age, pension plans can maintain a balanced portfolio that yields consistently high returns, generating an 11 percent cost savings.
– Pension plans pool longevity risk, meaning that they only have to save for the average life expectancy of a group of individuals. Workers in a 401(k) plan need an investment strategy that provides for the event that they live a longer than average life. Longevity risk pooling generates a 10 percent cost savings.
What’s more, cutting public workers’ retirement security by transitioning them to a 401(k) has its own set of unforeseen costs.
The average Illinois public employee makes a salary that is 13.5 percent less than their similarly educated counterparts in the private sector, trading front-end benefits like salary for back-end benefits like pension payments. With pension benefits gone, the state of Illinois may have to drastically increase public sector salaries or risk losing teachers, police officers, firefighters, and thousands of other critical workers.
Read the entire piece here.
Photo by TaxCredits.net
In the last decade, Alaska has overhauled its pension system by shifting public workers out of a traditional pension system and into a 401(k)-style system.
But another important change has, until now, flown largely under the radar. Alaska’s public employees used to be able to leave their jobs and come back later while still qualifying for the same benefit “tier”.
But the state changed that rule, so public employees who leave and come back can no longer be reinstated under the same tier. In essence, they have to start from square one again.
The state’s Supreme Court is now considering the legality of the change.
More from Juneau Empire:
Three justices of the high court traveled to Juneau Tuesday to hear grievances about a former state worker who, due to the law change, would be prevented from receiving the same level of retirement benefits as before if he returned to state employment.
Attorney Jon Choate, who along with his father attorney Mark Choate represents Peter Metcalfe, says the state of Alaska “broke its promise” to Metcalfe and as many as 85,000 former Public Employees Retirement System (PERS) members when it took away their ability to be reinstated at the same tier level they had when they left state employment.
“If the state makes a deal that lasts the lifetime of a public employee, the state doesn’t get to argue later, ‘Well, I really regret making that deal, it’s too expensive,’” Jon Choate said during oral arguments held at the state courthouse in downtown Juneau. “… Changing health care costs are a significant concern, but they don’t trump constitutional protection.”
Metcalfe is arguing that the state broke its contractual obligation to workers when it pared back benefits and closed off certain tiers to new hires.
The case is Peter Metcalfe v. State of Alaska.
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Pennsylvania Gov. Tom Wolf, in stark contrast to his predecessor Tom Corbett, has been adamant that he is not on board with any sweeping changes to the state’s pension system – particularly the switch to a 401(k)-style system favored by many of the state’s Republican lawmakers.
But House Republicans re-iterated last week that pension reform remains their “No. 1 issue” going forward.
More from the Citizen’s Voice:
State Rep. Mike Tobash, R-Pottsville, who drafted pension reform legislation in the last House session, said he thinks both houses of the Legislature are ready to deal with the estimated $47 billion to $60 billion debt in the state pension fund.
“The senate has come out and said it is their No. 1 issue,” Tobash said. “I think House Republican leadership feels exactly the same way. This $50 billion-plus debt is crippling us in a number of ways. It is crushing our school districts. If we properly dissect it, and we come forward with a number of bills, we will be better able to answer the problem in the minds of the different stakeholders and really get something accomplished.”
[…]
Tobash said the Legislature is attacking this issue from its multiple points.
“A series of bills being presented attack it from different areas,” he said. “One bill is a straight shift from defined benefit to defined contribution, which is more like the private sector. I think it is an optimum plan we are going to bring to the fore. We also have to look at the expense side.”
[…]
Tobash said legislators are looking at four areas: Existing member concessions, “to help work our way out of this debt, like increasing employee contributions;” the way the state delivers benefits “that are enhanced. Maybe we can ratchet them back a little bit;” early buyouts. “These are people who are vested but not collecting. Maybe we can buy them out and realize some long-term savings,” and finally, dedicated revenue. “I think it is important for analysts to take a look at Pennsylvania and see we have a commitment to pay down this debt.”
Rep. Tobash is the author of legislation, introduced in the last session, that would shift new hires into a 401(k)-style system.
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On Tuesday, the Omaha City Council approved a major change in the city’s pension system.
Starting on March 1, all new city hires will be placed into a pension plan that resembles a hybrid between a 401(k) and a traditional pension, as opposed to the defined-benefit plan currently in place.
Public safety workers are not affected.
The new plan, called a “cash balance plan”, will operate like a 401(k) in that its eventual payout will largely depend on the market.
But it does guarantee a minimum retirement benefit, much like a defined-benefit plan.
Current employees will keep their pension plan. But going forward, they will have to contribute a higher percentage of their paychecks to the system.
More from the Omaha World-Herald:
The pension changes, approved Tuesday by the Omaha City Council, mark a significant step in Mayor Jean Stothert’s goal of reducing employee costs and solving the city’s pension crisis.
And, Stothert said, the new plan will protect the city from future unfunded pension debt.
“We knew we could not just accept a contract that would fix the financial problem this year or the city’s budget this year,” Stothert said. “We had to look into the future to prevent those things from happening.”
[…]
These changes are intended to prevent the pension system from running out of money, which the civilian pension plan was previously projected to do within about 20 years.
Now, according to city estimates, it will be fully funded in that time frame.
Public safety workers aren’t affected by this change, because they work under different contracts.
But change could be coming soon: the city is currently in the midst of negotiating new contracts for police and firefighters.
The Military Compensation and Retirement Modernization Commission has spent the last two years drawing up policy proposals to decrease the cost of military benefits, including retirement benefits.
The Commission will make the proposals to Congress on Thursday, but people familiar with the report have already been revealing its contents to the USA Today and the Military Times.
According to the sources, the report will propose big changes to the military’s retirement system – including the phase-out of the military’s current defined-benefit plan, in favor of a hybrid plan that features characteristics of a 401(k).
More details from USA Today:
The Military Compensation and Retirement Modernization Commission will propose detailed legislation to phase out the current 20-year cliff-vesting pension payable immediately upon leaving service, according to people who have been briefed on the report but requested anonymity before discussing its recommendations.
The plan calls for Congress to create a hybrid system that includes a smaller defined-benefit pension along with more cash-based benefits and lump-sum payments. A significant portion of troops’ retirement benefits would come in the form of government contributions to 401(k)-style investment accounts, those familiar with the report told Military Times.
Specifically, the proposal calls for automatically enrolling each service member in the federal government’s Thrift Savings Plan, or TSP, an investment account that accrues savings. Individual troops will be responsible for managing their accounts, and the money is typically not available for withdrawal without penalty until age 59.5.
But that same proposal would make it easier for troops to keep their retirement benefits after leaving the military. USA Today reports:
By allowing many troops to keep their TSP government contributions after separation, the new proposal would give limited retirement benefits to the vast majority who leave the military before hitting the traditional retirement milestone of 20 years of service, most of them enlisted members who do four, six or eight years, then leave.
That’s a big potential change from a system that now offers retirement benefits to about only 17% of the force — many of them officers — who serve 20 years.
The retirement changes would only apply to new troops – not anyone currently enlisted or retired.
All of these proposals would still need to get through Congress to become law. Military compensation is a controversial area for cuts, so it’s unclear if the political will exists to move forward with the retirement system changes.
When talking pensions on the campaign trail early in 2014, Bruce Rauner said that new hires, current workers and retirees all would need to be on the receiving end of pension benefit cuts.
But Rauner has softened that stance in recent months; the Illinois governor now says the benefits accrued by current workers and retirees need to be protected.
From NBC Chicago:
[Rauner remarked] that it’s most important to “protect what is done—don’t change history. Don’t modify or reduce anybody’s pension who has retired, or has paid into a system and they’ve accrued benefits. Those don’t need to change.”
[…]
“What we should change is the future—the future accruals, the future benefits for future work,” he said, according to the Chicago Sun-Times. “That is constitutional. It’s also fair and appropriate for the taxpayers and the workers themselves.”
“Hopefully (the state Supreme Court) will give us some feedback that will help guide the discussion for future modifications as appropriate for the pensions,” noted Rauner.
Rauner’s website has also been updated accordingly and clarifies his official stance further. He is still pushing for a switch to a 401(k)-style system, but he wants to keep current retirees insulated from any changes:
We must keep our promise to current retirees, but we put all government workers at risk by continuing to promise a pension no one can afford.
[…]
We must boldly reform our pension system. To do that, we can:
* Ensure pay and benefits do not rise faster than the rate of inflation.
* Eliminate the ability of government employees to receive massive pay raises before they retire just to increase their pension.
* Cap the current system and move towards a defined contribution system.
The change in sentiment is perhaps due to a circuit court ruling late last year that overturned the state’s pension reform law, which made it more unlikely that pension reforms can legally come in the form of benefit cuts for retirees.
The law is currently being heard in the halls of the state Supreme Court.
It could also be that Rauner, since taking office and taking the temperature of fellow lawmakers, is now more in-tune with the political realities of steep pension cuts, and doesn’t see the worth in pushing an unpopular policy if it has little chance of coming to fruition.
By Steven Vance [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons
