defined benefit system

Nevada Lawmakers Debate Bill to Switch New Hires into 401(k) Plan

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

Researcher: High Transition Costs For States Switching From DB to DC Plans Are a “Myth”

Anthony Randazzo, director of economic research for the Reason Foundation, recently sat down with CapCon to talk about the concept of a state switching from a defined-benefit system to a defined-contribution system.

Disclosure: the Reason Foundation is a libertarian-leaning research organization.

Randazzo has published research in the past claiming that the “transition costs” of switching from a DB to a DC plan are largely a myth – and he expanded on that view in the interview.

From Michigan Capitol Confidential:

Michigan Capitol Confidential: You argue that these “transition costs” are a myth. What’s the basis for that myth?

Randazzo: The myth is based on two mistaken assumptions that certain steps need to be taken when switching from a defined-benefit system to a defined-contribution system. They are:

(1) That government must start making bigger debt payments to the defined-benefit system after it is closed.

(2) That a defined-benefit system needs new members in order to keep it solvent.

Neither of these assumptions are true. Regarding the first mistaken assumption; it might be recommended that a government increase the size of its debt payments after the system has been closed in order to pay off the debt sooner, but there is no legal requirement that it do so.

Regarding the second mistaken assumption, defined-benefit systems are supposed to be fully funded on a yearly basis by employer and employee contributions plus investment earnings. These systems are not based on new workers subsidizing older workers.

Michigan Capitol Confidential: So we have this disagreement between independent pension experts and individuals with an interest in the current systems. What’s at the core of this disagreement?

Randazzo: I think it is a disagreement between philosophies. It’s true that a defined-benefit system could be changed to a defined-contribution system that would be more expensive. But to prevent this, all you would have to do is put in a defined-contribution rate that ensures lower costs. Therefore, if the defined-contribution system – that’s put in place to try to solve a growing debt problem being created by a defined-benefit system – ends up costing too much, to me, that’s not a transition cost, it’s just the result of a bad policy decision.

[…]

Michigan Capitol Confidential: And you would argue that switching to a defined-contribution pension system would do away with most of the guesswork.

Randazzo: A defined-contribution system is 100 percent more transparent than a defined-benefit system because it requires zero actuarial assumptions about the future, and zero backroom negotiations with pension boards and union members. The costs of a defined-contribution system are clear every year: it is simply whatever the government body has chosen to be the contribution rate to each employee’s retirement account. The cost is known each year, and taxpayers don’t have to worry about whether investment returns will equal assumptions, or whether people will wind up living longer than expected and costing the system more money than it has projected pensions to cost.

Read the full interview here.

Photo by 401kcalculator.org

What Tom Wolf’s Win Means For Pennsylvania Pensions

Tom Wolf and Tom Corbett had two very different visions for Pennsylvania’s pension system. If newly-elected Governor Wolf attempts to reform the state’s retirement system, it will look very different than what Pennsylvania residents have experienced over the last few years under Corbett.

If Corbett had won, he would have pushed the legislature adopt a “hybrid” pension plan that incorporates qualities of a defined-benefit plan and a 401(k) plan.

Described by Institutional Investor:

In the 2013 legislative session, Corbett sought to pass pension reform as part of a package of three initiatives (the other two involved privatizing state liquor stores and a state transportation funding plan). Corbett’s pension plan would have enrolled future employees in a defined contribution plan and lowered future defined benefit payouts for current employees. Corbett’s office estimated that these changes would save the state $12 billion in employer contribution costs and $40 billion in plan costs over the next 30 years.

[…]

Corbett’s pension proposal did not pass the legislature. This June Representative Mike Tobash, a Republican, proposed a hybrid pension plan in which new employees would be enrolled in a combined defined benefit, defined contribution fund. This would start the state on the road to a DC system but lessen up-front costs by not shuttering the DB plan.

[…]

Almost immediately, Corbett came out and said he was in “full support” of Tobash’s plan. If reelected, Corbett says, he will call a special session of the General Assembly to tackle the pension problem. Opponents of the plan have taken to calling the plan the Corbett-Tobash pension plan.

But Tom Wolf doesn’t support the hybrid plan. What will the pension system under Wolf look like? He hasn’t offered much in the way of specifics, but he staunchly supports the state’s defined-benefit system. From Institutional Investor:

According to his campaign, Wolf “absolutely opposes changes to current employees’ pension plans, and he believes that a defined benefit retirement plan is the most effective tool for ensuring that our public workers have a financially secure retirement.” Wolf believes that to attract workers and create good private sector jobs, Pennsylvania must offer an attractive and competitive compensation package, which includes a defined benefit pension.

If elected, Wolf has said he will work with the legislature to find a solution to the pension-funding problem. But exactly what that solution might look like, with a governor so “absolutely opposed” to benefit cuts, remains to be seen. The General Assembly is likely to remain Republican, meaning the most probable scenario is a legislature favorable to benefit reform and a governor who is not. Unable to find a solution under four years of a pro-reform governor, a different approach maybe can work.

Pennsylvania’s pension systems are 63.9 percent funded, collectively. Pension liabilities have been the subject of several credit rating downgrades for the state.

NY Comptroller DiNapoli: Six Reasons the State Shouldn’t Switch to a 401(k) System

State Comptroller Thomas DiNapoli is the sole trustee of New York’s $180 billion Common Retirement Fund (CRF).

His challenger, Robert Antonacci, has said he would shift New York’s pensioners into a 401(k)-type plan if elected.

But during an editorial board meeting Monday, DiNapoli laid out six reasons why he’d keep New York’s defined-benefit system in place. From Syracuse.com:

1. It benefits 1 million New York employees and their families, a significant portion of the state’s population, he said. The average pension paid retirees, other than firefighters and police, is $21,000 a year.

2. The money paid out to retirees stays in New York, benefiting the state’s economy. About 80 percent of the people who receive a pension remain in the state, DiNapoli said.

3. The state’s pension plan is 92 percent funded and that’s a good asset to have when New York goes out to borrow money, he said. The health of the state’s pension plan is one of the things financial agencies look at when they issue bond ratings. Those ratings in turn affect the ability of the state and local municipalities to borrow.

4. New York has responded to current economic conditions by curtailing pension benefits for newly hired state employees. Local governments that have had a turnover in employees saw a savings as a result, DiNapoli said.

5. Twice in the past two years the state has cut the rate local governments pay into the system, he said.

6. Switching to a defined contribution plan won’t change the state’s obligation to provide a pension to the 1 million people already in the system, DiNapoli said. Plus, it would create retirement insecurity for even more New Yorkers. “A 401(k) was never meant to be the substitute for a pension,” DiNapoli said.

DiNapoli is leading Antonacci in the polls by double digits.

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