Video: State and Local Pension Reform – Can We Cut Costs and Improve Retirement Security?

This panel discussion, held by the Urban Institute, talks about pension reform at the state and local level. What do they mean for retirement security? And is there a way to cut costs for government without jeopardizing retirement security?

Panelists include researchers from the Brookings Institution, the Center for Retirement Research and the Urban Institute.


Cover photo by Matthias Ripp via Flickr CC License

Urban Institute Launches Public Pension Tool – “Build Your Own Pension Plan”

building blocks

The Urban Institute has released its “Build Your Own Pension Plan” tool, which allows users to construct and analyze the costs and benefits of self-made pension plans.

The tool, outlined by Pensions & Investments:

State and local governments dealing with pension challenges can use a new tool from the Urban Institute in Washington to model possible changes.

The independent think tank released on Tuesday the interactive tool, “Build Your Own Pension Plan.”

As part of its Public Pensions Project, the Urban Institute also has a pension report card that grades states on pension funding, retirement security for both short-term and long-term employees, and workforce incentives.

New approaches like cash balance plans and offering annuities for public-sector workers score well on the report card, said Richard Johnson, senior fellow and program director for retirement policy at the Urban Institute. While they don’t solve current underfunding woes, “they represent the kind of bold thinking needed to address the pension challenges confronting state and local governments. There are better ways of reforming pensions that can provide public servants with secure retirements and still save taxpayers money,” Mr. Johnson said in a statement.

Use the tool here.


Photo by  Michael Scott via Flickr CC License

Video: Entitlement Reform and the Future of Pensions

The above talk was given by Gene Steuerle (Urban Institute) at the 2014 Pension Research Council Conference; Steuerle spoke about his research into the inevitability of entitlement reform and what it means for the future of pensions.

Mr. Steuerle’s biography:

Eugene Steuerle is Richard B. Fisher chair and Institute Fellow at the Urban Institute, and a columnist under the title The Government We Deserve. Among past positions, he has served as Deputy Assistant Secretary of the Treasury for Tax Analysis (1987-1989), President of the National Tax Association (2001-2002), chair of the 1999 Technical Panel advising Social Security on its methods and assumptions, Economic Coordinator and original organizer of the 1984 Treasury study that led to the Tax Reform Act of 1986, President of the National Economists Club Educational Foundation, Resident Fellow at the American Enterprise Institute, Federal Executive Fellow at the Brookings Institution, and a columnist for the Financial Times.

Dr. Steuerle is the author, co-author or co-editor of fifteen books and close to one thousand articles, briefs, and Congressional testimonies. Books include Contemporary U.S. Tax Policy (2nd edition), Retooling Social Security for the 21st Century, and Nonprofits and Government. He serves on advisory panels or boards for the Congressional Budget Office, the Government Accountability Office, the Joint Committee on Taxation, the Committee for a Responsible Federal Budget, the Independent Sector, the Aspen Institute Initiative on Financial Security, the National Committee on Vital and Health Statistics, and the Partnership for America’s Economic Success.

Alicia Munnell: Should Insurers Handle Public Pension Payouts?

US Capitol dome

Last month, Pension360 covered the Urban Institute’s ringing endorsement of a Congressional bill that would let local governments turn over the assets of their pension plans to insurance companies, who would then make payments to retirees.

Senator Orrin Hatch proposed the bill, called the SAFE Retirement Plan.

On Wednesday, another major pension player threw their opinion in the ring: Alicia Munnell, director of the Center for Retirement Research at Boston College.

She begins by outlining why the Urban Institute likes the plan, and why the Pension Rights Center doesn’t:

The folks at the Urban Institute think that this plan is terrific. They gave it an “A” under all seven of their criteria: 1) rewarding younger workers; 2) promoting a dynamic workforce; encouraging work at older ages; 4) retirement income for short-term employees; 5) retirement income for long-term employees; 6) making required contributions; and 7) the funded ratio.

Essentially it does not allow sponsors to underfund plans (items 6 & 7) and provides a more equitable distribution of benefits across participants’ age demographics. That is, young and short-term workers get more benefits and older workers have less incentive to retire than under a traditional defined benefit plan. With their criteria, the Urban Institute researchers would always give a higher grade to any type of cash balance or defined contribution plan than to the current defined-benefit plan.

The Pension Rights Center lumps the Hatch proposal with other de-risking activities, such as General Motors transferring its retiree liability to Prudential. In the private sector, such a transfer means the loss of protection by the Pension Benefit Guaranty Corporation (PBGC), and reliance on the strength of the insurance company to provide the benefits. Such a loss does not occur in the case of state and local plans, because these plans are not covered by the Employee Retirement Income Security Act of 1974 and therefore benefits are not protected by the PBGC.

Munnell then delves into her own opinion:

First, I am not quite sure how it would work. In the private sector, a company can spin off only fully funded plans. But few public sector plans are fully funded. Is the suggestion to close down the current public sector defined benefit plan and send all future contributions to the insurance company? In many states that path would be quite difficult given that employers cannot reduce future benefits for current employees. So I am not clear how a SAFE Retirement Plan would actually be adopted.

Second, I am very concerned about costs. One issue is that investments would be limited to those acceptable for underwriting annuities, a requirement that means essentially an all-bond portfolio. Trying to produce an acceptable level of retirement income without any equity investments requires a very high level of contributions. My other concern on the cost side is fees; insurance companies need a significant payment to take on all the risks associated with providing annuities.

In short, the SAFE Retirement Plan doesn’t seem like either a feasible or efficient way to provide retirement income. Fortunately, the plan is optional. So, I’m moving on to other topics!

Munnell runs the Center for Retirement Research and the Public Plans Database.

Urban Institute Endorses Bill That Would Turn Over Pension Assets To Insurance Companies

United States Capitol Dome

A bill that’s spend the last year gathering dust in Congress has been given new life this week after the Urban Institute gave the bill it’s top grade, saying the proposal “really addresses the retirement security issue”.

The bill, authored by Sen. Orrin Hatch (R-Utah), would let local governments turn over the assets of their pension plans to insurance companies. The insurance companies would then make payments to retirees. More details from Wonkblog:

On Wednesday, Hatch’s proposal, aimed at getting local governments and states off the hook for future pension liabilities, got a big thumbs-up from the non-partisan Urban Institute.

After reviewing the plan, the research organization gave the idea its top grade, saying it eliminates a troublesome financial risk for state and local governments, protects workers who change jobs frequently, and rewards young workers–all while providing a steady stream of income for retirees.

“Unlike any other plan I have seen, it really addresses the retirement security issue, the funding problem, and it provides incentives to allow employers to attract and retain a productive workforce,” said Richard Johnson, director of the Urban Institute’s Retirement Policy Center. “It is hard to balance those three objectives.”

The Hatch bill is similar to a financial maneuver taken by several big corporations, from General Motors and Ford to Heinz and Verizon, which have moved to shed pension liabilities in recent years. For local governments and states, the unfunded liabilities are huge, ranging anywhere from $1.4 trillion to more than $4 trillion, depending on the assumptions plugged in by actuaries.

As it stands, a study of 150 plans by the Center for Retirement Research at Boston College found that the plans have just 72 percent of the assets on hand needed to cover future liabilities, a figure that drops to just under 65 percent if new accounting standards are used.

Insurance companies love the bill. But not everyone thinks it’s a good idea, writes Michael Fletcher:

It has been panned by municipal employee unions and their allies, who worry that payments will not be as generous as current pension schemes, particularly for long-tenured workers. Johnson noted, however, that many pension plans tend to shortchange workers who stay on the job fewer than 20 years, and he said Hatch’s plan would address that, although workers who stayed on the job longer would get smaller payments than their predecessors.

Still, some critics have called it “a solution in search of a problem,” a characterization that has left Hatch incredulous.

“My bill is not a solution in search of a problem, and it is certainly not meant to be an attack on anyone or anything,” Hatch said during a Capitol Hill event Wednesday. “It is meant to offer and alternative path to employers who want to continue delivering lifetime retirement income for their workers in a world where that is becoming increasingly difficult.”

The bill wouldn’t force the hand of state and local funds; governments would have the choice of handing over their assets to insurance companies, but it would be voluntary.


Photo by: “US Capitol dome Jan 2006″ by Diliff. Licensed under Creative Commons Attribution 2.5 via Wikimedia Commons

Urban Institute Rates Pennsylvania PERS Among Worst In Nation At Covering New Hires

Pennsylvania quarter

The Urban Institute released a report Thursday studying the pension benefits paid by Pennsylvania’s State Employees Retirement System.

The authors rated the System as the third worst in the country in terms of covering new state employees. From the report:

Pennsylvania’s pension plan for state employees receives a failing grade in the Urban Institute’s state and local pension plan report card, and ranks as the third-worst plan in the nation covering newly hired general state employees. The plan scores poorly because it is inadequately funded, it penalizes work at older ages by reducing lifetime benefits for older employees, and it provides few retirement benefits to short-term employees. Age-25 hires must work 32 years before they accumulate rights to future pension benefits worth more than their required plan contributions. Various pension reforms could distribute benefits more equitably across the workforce.

More details on the report’s findings, as reported by TribLive:

The study, published Thursday, said SERs, the state employee retirement system fund that serves about 120,000 retirees and 105,000 state workers, has an $18 billion shortfall and deficits that result in dramatic inequities in pension benefits.

The plan ties benefits to years of service. Researchers found 76 percent of all state-financed pension benefits go to the 25 percent of employees with the largest pensions, and the top 5 percent of recipients receive 22 percent of all benefits.

Those who leave after five years, the minimum time to vest in the system, fared poorly.

Only Massachusetts and New Jersey scored worse than Pennsylvania in terms of covering new state employees, said economist Richard W. Johnson, a senior fellow with the Washington-based Urban Institute and lead author of the study.

Read the full report here.

Report: Kentucky reforms benefit most workers—but hurt some, too


It’s early yet, but a new analysis of Kentucky’s recent pension overhaul says that the reforms are working—at least for some.

The study, released by the Urban Institute today, shows that the state’s reform measures will result in more benefits for most workers, although the most experienced workers in Kentucky’s system are not likely to benefit at all.

From the Courier-Journal:

Researchers concluded that the shift will provide at least as much lifetime benefit to 55 percent of vested employees and that most workers with up to 24 years of service will fare better compared to the traditional plan.

But, the report notes, most workers with more than 25 years of service, or those hired later in life, would benefit more from the traditional plan. And employees with 30 years or more will receive about $180,000 less under the change, it said.

The reform measures, signed into law last year, switch public employees from a defined-benefit plan to a hybrid cash-balance plan.

A recap of the new plan:

The state’s traditional retirement plan determined pension benefits based on an employee’s salary. The cash balance approach guarantees a 4 percent return while basing additional benefits on investment performance at Kentucky Retirement Systems. But the change only applies to employees hired after Jan. 1.

Proponents argue that it will help spread out investment risks between government and workers and save the state money during economic downturns.

Draine said the report shows 90 percent of the benefits went to only a quarter of employees under the old system, while that number drops to 66 percent with the reforms.

But critics contend that it makes retirement income less predictable for public employees.

Kentucky is also required under the law to make its full Actuarially Required Contribution, which it frequently skipped out on over the past decade. That comes at a cost of about $100 million annually, which was paid for by eliminating COLAs and increasing the state’s personal income tax.

As of 2011, Kentucky’s retirement system has the 7th highest unfunded pension liability in the country. The Kentucky Employees Retirement System is only 50.5% funded.


Photo Credit: OZinOH via Flickr Creative Commons License