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With Lawmakers In Recess and Elections On Horizon, Pennsylvania’s Pension Debate is Heating Up

Pennsylvania Gov. Tom Corbett has spent the first week of August touring the state as part of his re-election campaign, and he’s using the opportunity to hammer home Pennsylvania’s need to lower the costs of its retirement system, and tout his policy ideas on the subject.

One idea that Corbett has frequently proposed is shifting some state workers from their defined-benefit plans into 401(k)-style plans. Nearly every state burdened with pension obligations has considered this policy option. Many have even implemented it. From PennLive:

Only Alaska and Michigan have shifted new hires into 401(k)-style programs, but nearly a dozen states have crafted hybrid programs featuring smaller lifetime pension plans along with a 401(k)-style plan, and some states, such as Florida, are giving new employees the option of going entirely into a 401(k)-style plan, our pal Deb Erdley at The Tribune-Review reports.

Corbett’s repeated harping on the pension issue has gotten him, to some extent, what he wanted back in June: a debate. Even if state lawmakers remain on vacation, many experts have been weighing in on the issue.

Richard Johnson, director of the Washington-based Urban Institute’s Program on Retirement Policy, makes this note on the switch from DB to DC:

“These defined-benefit plans work very well if you’re going to stay for 30-35 years, but they require a pretty large employee contribution, and they don’t work very well for the shorter-term worker,” Johnson tells the newspaper.

Stephen Herzenberg of the Keystone Research Center points to the experiences of other states as an argument against switching to a 401(k)-style plan:

In fact, when Florida created this choice, its traditional pension was overfunded. In a decade-plus since, the investment returns of Florida’s traditional pension have been 10 percent higher than the return on individual accounts. Over the 30 years that typical retirement contributions grow, this difference would become a one-third gap in savings available for retirement.

Alaska and Michigan did shift all new hires into 401(k)-style plans but the switch did not, in fact, work. Pension debt in both states grew.

Rhode Island did save some money but only because of deep cuts in traditional pensions, including for current retirees. The state then wasted some savings on a “hybrid plan” for new employees that included 401(k)-type accounts with low returns and high fees.

Guaranteed pensions need sound management and can get in trouble if politicians fail to make required contributions. But long term, there’s no beating the high returns of professional managers and the low costs of pooled pension assets. That’s why Pennsylvania’s current pension design is the best deal, long term, for taxpayers and retirees.

Nathan A. Benefield, Vice President of Policy Analysis at the Commonwealth Foundation, took issue with that critique:

Herzenberg claims that reforms moving state workers to a 401(k)-style retirement plan in other states have “failed” because their traditional, non-401(k) pension funds lost value during the most recent recession. Huh?

Every state¹s pension fund lost value when the stock market fell, including Pennsylvania’s, which went from being fully funded to today having more than $50 billion (and growing) in unfunded liabilities. That’s about $10,000 per household in the state.

Now here’s the rub. States like Michigan and Alaska would have lost more from their pension funds had they not started to convert new employees into a 401(k). In fact, without reform, Michigan’s unfunded liability would be upwards of $4.3 billion more.

Thankfully, because lawmakers in the Wolverine state acted early, they saved taxpayers those additional costs. Pennsylvania would have also had substantial savings had we followed Michigan’s lead.

Corbett has tried desperately to make pension reform a campaign issue. It has worked. He’s gotten the media, thought leaders and everyday citizens talking about Pennsylvania’s retirement system and the policy options to address the issues Corbett foresees.

That’s healthy for the state—but make no mistake, it’s probably just as healthy for Corbett’s election chances.

Screen shot 2014-08-08 at 10.35.12 AM — Credit: Wikipedia

He’s been gaining ground on challenger Tom Wolf in recent weeks.

Study: For Low-Income Workers, Retirement Not In The Cards

Defined-benefit pensions are becoming rare in the private sector, and many public-sector new hires are increasingly being enrolled in 401(k)s instead of traditional pensions.

Combine that with the fact that many lower-paid workers don’t have access to retirement plans at all, and these trends paint a grim picture: seventy million baby boomers are nearing retirement, and many of them aren’t financially ready.

In fact, recent data show that although high-income workers are saving for retirement at higher rates than ever, low-income workers are saving less—if they’re saving at all.

From the Associated Press:

Because retirement savings are ever more closely tied to income, the widening gulf between the rich and those with less promises to continue — and perhaps worsen — after workers reach retirement age. That is likely to put pressure on government services and lead even more Americans to work well into what is supposed to be their golden years.

Incomes for the highest-earning 1 percent of Americans soared 31 percent from 2009 through 2012, after adjusting for inflation, according to data compiled by Emmanuel Saez, an economist at University of California, Berkeley. For everyone else, it inched up an average of 0.4 percent.

Researchers at the liberal Economic Policy Institute say households in the top fifth of income saw median retirement savings increase from $45,539 in 1989 to $160,000 in 2010 in inflation-adjusted dollars. For households in the bottom fifth, median retirement savings were down from $8,433 in 1989 to $8,000 in 2010, adjusted for inflation. The calculations did not include households without retirement savings.

Employment Benefit Research Institute research director Jack VanDerhei found that in households where annual income is less than $25,000, nine in 10 saved less than $10,000, up slightly from 2009. For households with six-figure incomes, 42 percent saved at least $250,000, up from 34 percent five years earlier.

Experts say that about half of private-sector workers aren’t enrolled in a retirement plan at their job. According to the Employee Benefit Research Institute, only 13 percent of private-sector workers are enrolled in defined benefit plans.

In 1985, 33 percent of workers were enrolled in such plans.

These trends haven’t been lost on younger workers. Millennials are now starting to save early in their careers, according to a new report. From Bloomberg:

Concern that the future of the federal safety net for seniors is precarious and the ubiquity of 401(k)s are prompting those born from 1979 to 1996 to get an earlier start on saving than prior generations, according to a report from the Transamerica Center for Retirement Studies. Millennial workers began building nest eggs at a median age of 22, younger than both Generation X, which started at 27, and the baby boomers, who started at 35.

Though many millennial workers say they’re risk-averse and stock-shy as a result of the most severe recession in the post-World War II era, their deeds are telling a different story. That bodes well in the long run for a generation that may have to bear a greater share of retirement costs on its own, even if it means the economy will get a little less consumer spending in the short term.

Of millennials offered 401(k) or similar plans, 71 percent took part, contributing a median 8 percent of their salaries, the Transamerica report said. The survey polled those employed either full-time or part-time at for-profit companies.

That stands in stark contrast to surveys showing young adults are risk averse. In 2012, 22 percent of heads of households younger than 35 who owned mutual funds said they would only invest in financial instruments with no or below-average risk even if it meant getting a below-average return, based on a survey by ICI, the mutual-fund industry’s trade association.

Aside from seniors (65 years or older), the percent of millennials that own mutual funds is higher than any other age group.

Photo by 401(K) 2012 via Flickr CC License

Private Equity Sets Sights on 401(k)s

Private equity funds have been a staple of the investments of defined-benefit plans for decades. But as the prominence of defined-benefit plans diminish and defined-contribution plans rise in their place, private equity firms now have their eyes on another prize: 401(k)s.

So said several major private equity players who spoke as part of a panel discussion at the Fifth Annual Innovative Alternative Investment Strategies Conference on Thursday.

From Financial Advisor magazine:

[Red Rocks Capital co-founder Mark] Sunderhuse sees big opportunity for private equity in the defined contribution space. “Target-date plans will use private equity,” he said. “There’s a lot of work with consultants going on, and different types of products will fit different boxes. We’ve had conversations with a number of people in more mainstream mutual fund-type formats where they’ll use it [the Red Rocks fund]. Our product is primarily used in investment models where people want private equity exposure in way where they can manage the risk and be able to reallocate it and rebalance it.”

Kevin Albert, a partner at Pantheon, a global private equity investment company, said U.S. public pension plans on average have 10 percent of their assets in private equity. But defined benefit pension plans are becoming dinosaurs both in the U.S. and abroad.

“That has motivated the best firms in the private equity industry to raise capital from other sources, and the two biggest other sources are defined contribution plans and private affluent investors,” Albert said. “And that’s a good thing because 15 years ago it was hard to convince a top 10 private equity fund to raise a feeder fund or to participate in an offering that would go to individual investors. They saw it as less prestigious, and viewed it as more complicated from a regulatory perspective.

“Now you’re seeing firms like Carlyle, KKR and Blackstone at the vanguard of this,” he continued. “So I think we’re in the middle of an amazing revolution in the repackaging of private equity to make it attractive to defined contribution plans, which have different needs and desires than defined benefit plans did. So I think that will be a meaningful difference in this industry from five, 10, 15 years ago.”

The discussion came up when the panelists were asked to explain a few key trends they see playing out in private equity in the next five years.

Photo by 401kcalculator.org

Finding Common Ground In Pension Reform: Lessons from the Washington State Pension System

“In the wake of the economic recession, public pension plans have emerged as an increasingly salient and contested public policy issue. The debate over public pensions is driven in large part by the fact that many public retirement systems are significantly under-funded. For example, numerous estimates peg the national shortfall in public pension assets relative to liabilities at several trillion dollars.

Given the pervasiveness of funding shortfalls, there have been proposals to shift public-sector pensions from defined benefit (DB) plans towards defined contribution (DC) plans which are, by definition, fully-funded. However, this approach is not without controversy, as it shifts the future risk associated with investment returns earned on pension assets away from taxpayers and towards employees and raises questions about employee preferences for different types of pension plans and how reform might affect retirement security and workforce composition. In addition, moving towards a DC-type pension system does nothing, by itself, to address existing shortfalls.” Read the complete report here.

Photo by Gates Foundation via Flickr CC License

Oklahoma moves forward with bill aiming to eliminate traditional pensions for state workers

Oklahoma’s landscape is dotted with abandoned frontier forts, Civil War battle sites and other relics of history.

Now you might be able to add another relic to that list: state sponsored defined-benefit pension plans, which could soon become a remnant of the past in Oklahoma.

The state’s House of Representatives passed a bill today that would shift newly hired state workers from the current defined-benefit system into a 401(k)-style defined-contribution plan.

Under the plan, employees would allocate at least 3% of their paychecks to the retirement plan, and the state would match those contributions up to 7%.

The bill doesn’t apply to teachers, firefighters or police officers, and would only cover state workers who are hired after November 1, 2015.

The Associated Press has more details:

The state worker salary bill would set aside 3 percent of the previous fiscal year’s payroll costs for salary adjustments each year and give the Office of Management Enterprise Services authority to set pay structures and determine if targeted adjustments are needed.

Its author, Rep. Leslie Osborn, R-Mustang, said it will provide initial raises to the state’s lowest-paid workers, including corrections, human services and public safety workers, at a cost of about $40 million.

State worker salaries are about 20 percent below comparable jobs in the competitive labor market. The measure would boost salaries to 90 percent of private-sector pay over four years.

Opponents of the measure are concerned that it shifts too much risk onto workers. The payout of a 401(k) plan is determined by the performance of its underlying investments, which means an economic downturn would severely decrease the value of retirees’ nest eggs.

The bill now moves to the Senate, where it is expected to pass.

Photo Credit: KatsRCool via Flickr Creative Commons License

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