Pennsylvania Lawmaker Will Reintroduce Plan to Create 401(k) System for All New Public Employees

Pennsylvania

Pennsylvania State Rep. Warren Kampf says he will be reintroducing a bill that would significantly alter the states pension system.

The bill would create two new defined-contribution plans: one for state employees and one for school district employees.

All future state hires would be funneled into these 401(k)-style plans. In other words, the bill would block off the current defined-benefit pension system to all new hires.

More from Pennsylvania Business Daily:

Included in Kampf’s legislation would be a 4 percent employer match and a mandatory employee contribution.

“These are the types of retirement plans the vast majority of our constituents have in their own lives,” Kampf said. “These are plans that businesses across our country use in their budgets to avoid financial obligations that cannot be planned. We are simply asking public employees to follow the same plans used by those in the private sector as a way to stop the growing havoc public pension systems have created for taxpayers all across the country.”

“We must act now,” Kampf said. “Our public pension crisis only deepens as the days go by.”

If the bill were to pass the state’s legislative chambers, it likely wouldn’t get past the desk of new Governor Tom Wolf.

Wolf has said he opposed big changes to the state’s pension system and wants to give previous reforms time to take effect.

 

Photo credit: “Flag-map of Pennsylvania” by Niagara – Own work from File:Flag of Pennsylvania.svg and File:USA Pennsylvania location map.svgThis vector image was created with Inkscape. Licensed under CC BY-SA 3.0 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Flag-map_of_Pennsylvania.svg#mediaviewer/File:Flag-map_of_Pennsylvania.svg

Examining an Insider’s View of Canada’s Pension Debate

Canada

Last month, the Toronto Star interviewed Tom Reid of Sun Life to get an insider’s view of Canada’s pension debate. The interview can be read here.

This week, Leo Kolivakis of the Pension Pulse blog penned his own critical examination of the debate. The post can be read below.

____________________________________

By Leo Kolivakis, Pension Pulse

Indeed, the Canadian Life and Health Insurance Association is hopping mad and expressed its disappointment on its website.

The problem is that the CLHIA is spreading misinformation and outright lies on the so-called benefits of defined-contribution (DC) plans. They are nowhere near as safe and secure as defined-benefit (DB) plans and they’re a lot more costly, regardless of what Reid claims. They also don’t perform as well over long investment horizons because they don’t invest in private investments.

Go back to carefully read my comment on the brutal truth on DC plans, it’s a real eye-opener. We have become so ill-informed on this debate that we accept the lies and misinformation being spread out there.

As I’ve long argued on this blog, there is a case for boosting DB plans in Canada and elsewhere. The benefits of DB plans are well-known and under-appreciated.

Importantly, boosting DB plans, especially now that Canada’s crisis is just beginning (if you wait for “better economic conditions” you will never enhance the CPP!), makes for good retirement and economic policy. Why? Because if you do it properly, adopting world class governance standards, you will enhance economic activity, increase the revenue from sales taxes and reduce the overall debt of the country.

Of course, the insurance and banking industry don’t agree and will keep pushing the Conservatives to peddle PRPPs as the solution but they’re wrong and they know it. They’re petrified of Canada’s top ten and for good reason, when you look at the evidence, our large DB plans are doing an outstanding job providing their members with safe and secure retirement benefits. No DC plan can compete with our large DB plans.

Are Canada’s top ten perfect? Of course not. If they were, this blog would never exist. But take it from this insider, given a choice between anything Prudential, Sun Life, Manulife or Canada’s big banks have to offer and having your retirement money managed by our large DB plans, you should always opt for the latter. Period.

Does this mean that banks and insurance companies should get out of the retirement business altogether and just leave it up to our large DB plans? No, I believe there is a market for what they’re doing and they can certainly compete with the internal portfolio managers at our large DB plans but they’re going to have to lower their fees and change their angle.

In fact, if banks and insurance companies in Canada were smart (they’re hopelessly myopic!) and realized the bigger picture, they would be forcing the federal government to enhance the CPP for all Canadians and boost our DB plans.

I leave you with a comment Bruce Rogers wrote to the Toronto Star in regards to the interview above:

Thanks for devoting space to Ontario’s plans for a pension to supplement the Canada Pension Plan. Too bad your effort gave the platform to an interviewee who has a financial interest in the inadequate, defined contribution approach to the problem.

Our society clearly needs to take action to ensure that retirees and seniors generally enjoy financial security and a modicum of dignity. To argue against a more generous defined benefit approach is to ignore a serious problem.

Of course, the Harper government has made its decision and Bay Street will agree with that course. Let’s hope the business pages of the Star will balance the debate in future, perhaps by exposing the growing threat to defined benefit pensions where they exist.

This is an informed reader who understands what’s at stake. When it comes to retirement policy, we need to go Dutch on pensions and not take lessons from Down Under or worse, the United States of pension poverty.

Lastly, I wish the media in Canada would start interviewing real pension experts like Jim Leech, Leo de Bever, John Crocker and others who truly understand what is at stake and why we need to boost defined-benefit plans for all Canadians.

 

Photo credit: “Canada blank map” by Lokal_Profil image cut to remove USA by Paul Robinson – Vector map BlankMap-USA-states-Canada-provinces.svg.Modified by Lokal_Profil. Licensed under CC BY-SA 2.5 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Canada_blank_map.svg#mediaviewer/File:Canada_blank_map.svg

Questions Surround Bruce Rauner’s Pension Proposal, But Rauner To Be Mum on Specifics Until Court Ruling

Bruce Rauner

Illinois’ pension reform law currently sits in legal limbo. But if the Supreme Court deems it unconstitutional, all eyes will shift to Illinois Gov. Bruce Rauner, who will need to propose a new solution to the state’s pension woes.

On the campaign trail, Rauner supported a plan to shift workers into a 401(K)-style plan. He has since softened his stance a bit, but hasn’t offered much in the way of clarification as to the specifics of his plan.

From the Chicago Tribune:

With Rauner taking over, the pension debt remains unsettled. As has been the case on many issues, the Republican has offered general answers about his preferences for dealing with public pensions and how he’ll respond if the new law is struck down.

“We have some very specific thoughts on that, but we’ll be developing those with the General Assembly,” Rauner said during a postelection visit to the Capitol. “We need a comprehensive, fair overhaul of the pension system, and we’ll make that a top priority.”

[…]

Asked recently if the state should begin working on a “Plan B” while the pension law is debated by the state Supreme Court, Rauner said his “preference is probably to wait until the Supreme Court rules, so we have some ground rules for what probably works and what won’t work. I think that’s a smarter way to do it.”

Would Rauner’s 401(k) plan work? Would it be constitutional? What are the specifics? And is that still his plan? From the Chicago Tribune:

In his successful campaign, Rauner spoke generally about wanting to shift public employees from receiving a defined pension benefit into becoming members of a defined contribution plan similar to a 401(k)-style system.

Rauner has said public workers should be able to keep the benefits they have already accrued, but, moving forward, go into a defined contribution system. He also has said public safety workers should stay in the current system. And, with 80 percent of public employees not eligible to receive Social Security, Rauner has said he favors some unspecified plan to create a retirement safety net.

But it’s unclear whether Rauner’s concept is constitutional, as he maintains, or how it would address the current unfunded pension liability since payments would go into a new retirement system rather than address the shortfalls in the current system.

“Not only does it not solve the problem, but it makes it worse in the near term,” Dye said. “Whatever the solution is will cost something, and I don’t know how it would be implemented. It’s hard to add (Rauner’s concept) up as a fiscal benefit for the state.”

Illinois is expected to make $6.6 billion in pension payments in fiscal year 2015. The state is saddled with over $100 billion of pension debt.

 

By Steven Vance [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

In Congress, Leadership Shifts Could Lead to Retirement Plan Changes

Capitol dome

Republicans control both houses of Congress, and there are many leadership shifts underway at the committee level as well. These shifts open the door for changes to retirement plans coming from the federal level.

One idea sure to be brought up is Senator Orrin Hatch’s SAFE Retirement Act. From Pensions and Investments:

At the committee level, the change of leadership raises the prospects for serious consideration of new retirement ideas, like incoming Senate Finance Committee Chairman Orrin Hatch’s SAFE Retirement Act proposal, which would expand the use of multiple employer plans, allow public defined benefit pension funds to purchase private annuities, and create a “starter 401(k) plan” for small, private-sector employers.

Lawmakers could also take a closer look at defined-contribution plans and cash balance plans. From P&I:

As the tax reform debate heats up, “Republicans are going to want to cut expenses and raise revenue,” said Michael Webb, vice president of Cammack Retirement Group, Wellesley, Mass., a consulting firm specializing in defined contribution plans. “How do you do that? By changing things like deductibility on retirement plan contributions.”

Along with those discussions, “there might be opportunities in 2015 for retirement plan proposals that would enhance coverage and benefits,” said Kent Mason, an attorney at law firm Davis & Harman LLP, Washington, who is outside counsel for the American Benefits Council, Washington. He and others note that multiple employer plans enjoy bipartisan support in Congress, which could convince regulators to make them easier to create.

Both Republicans and Democrats would like to see more automatic enrollment and escalation in defined contribution plans. “This is showing up in bipartisan bills because (current default rates) are not high enough” for retirement security,” said Mr. Mason. “This is an area where I could see common ground.”

Hybrid retirement ideas like cash balance plans will come up early, starting with a Jan. 9 hearing on IRS regulations finalized in September for plan years after 2015. “I do think there is pent up demand for some type of DB (proposal),” said Alan Glickstein, Dallas-based senior retirement consultant at Towers Watson & Co. Hybrid pension plans for the military will also come up early in the year, when recommendations from the Military Compensation and Retirement Modernization Commission are due, sources said.

Read the full article here.

Memphis Council Approves Hybrid Pension Plan; Changes Will Affect Many Current Workers

Memphis City Council

After several meetings worth of debate, the Memphis City Council passed major changes to the city’s pension system on Tuesday – and the changes won’t just affect new hires.

Details of the new hybrid plan, reported by Fox Memphis:

Council passed a hybrid plan that was backed by Councilwoman Wanda Halbert that grandfathers in current employees with 7.5 years of experience, effective July 1, 2016.

This plan was introduced by Councilwoman Halbert, who drew harsh criticism from the crowd despite that her plan was approved.

So what does it mean? New hires and city employees with less than 7.5 years on the job will switch over to a new pension system. It mixes a retirement account with a defined contributions plan. Her plan only introduced two weeks ago after Councilman Myron Lowery introduced his plan that would only apply to new hires.

City employees in the crown expressed their anger over the changes. From Fox Memphis:

Members in the audience, many of them city employees, agreed with Councilman Lowery and blasted Councilwoman Halbert saying she had betrayed the city.

[…]

“This was an embarrassment to the City of Memphis that they make decisions that are that callous with that little bit of research on he table,” ,” said Kathy Hurley of Memphis. “If you just watch the film and see what all went on it’s obvious the right hand doesn’t know what the left hand it doing. It’s sad.”

Labor groups will likely sue over the changes.

Bruce Rauner Named Most Important Player in U.S. Pensions

Bruce Rauner

Institutional Investor magazine has released its list of the 40 most influential people in U.S. pensions. Topping the list is the man who now governs a state with one of the worst pension problems in the country: Bruce Rauner.

From Institutional Investor:

Republican Bruce Rauner, the victor over Democratic incumbent Pat Quinn in the recent Illinois gubernatorial race, may regret he ever wished to win elective office. Rauner, onetime chairman of Chicago private equity firm GTCR, has had no real profile on retirement policy but finds himself staring at what may be the most serious pension mess among the states.

As of June 30, 2014, Illinois’s pension debt had reached $111 billion; Moody’s Investors Service reported in September that the state’s three-year average pension liability over revenue was 258 percent, five times the median percentage for all 50 states.

In 2013, Quinn persuaded the legislature to pass a bill raising the retirement age and cutting cost-of-living increases for beneficiaries. But the Illinois constitution holds that pensions cannot be “diminished,” and a coalition of public employee unions sued. And on November 21, Sangamon County Circuit Judge John Belz found the law unconstitutional, declaring, “Protection against the diminishment or impairment of pension benefits is absolute and without exception.”

Depending on various appeals, Rauner, 57, could try to implement his campaign agenda for pensions, which includes capping the current program and shifting members to a defined contribution plan — though he has begun to talk of just shifting new employees to avoid legal problems. Rauner has said he’d seek to keep benefits from rising faster than inflation and would eliminate employees’ ability to receive large pay hikes before retirement to beef up their pensions.

The odds of pushing these reforms through a Democratic-controlled state senate remain long, made worse by allegations that Rauner (and separately, Chicago mayor Rahm Emanuel [No. 4]) accepted contributions from executives affiliated with firms that manage Illinois pension plans. Rauner has not publicly responded to the allegations.

The ranking clearly reflects not what Rauner has already done, but the power he will have in the coming years. If the Illinois Supreme Court strikes down the state’s pension reform law, lawmakers will have to start from scratch – and Rauner will be at the helm.

 

Photo By Steven Vance [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

Why Have Local Governments Been Slow to Adopt Automatic Enrollment Practices?

savings jar

As defined-benefit plans around the country become more costly, some local governments have begun switching new hires into defined-contribution (DC) plans.

But those same governments have been slow to adopt automatic enrollment practices, according to a report published in the November issue of Pension Benefits.

From the article:

The public sector has been much slower that the private sector to adopt automatic enrollment for its defined contribution (DC) plans: only 2% use automatic enrollment. Currently, five states have automatic enrollment for the DC plans available for their workers: Georgia (ERSG), Missouri (MOSERS), South Dakota (SDRS), Texas (TRS), and Virginia (VRS).

[…]

Workforce trends and the current state of public retirement benefits strongly suggest that DC features that encourage savings, such as automatic enrollment, can play an important role in the retirement income security of many public employees.

So why haven’t local governments adopted auto enrollment practices? The article’s author, Paula Sanford, offers some reasons:

– Legal constraints. Only 11 states permit automatic enrollment for public DC plans. In a few places, an exemption to anti-garnishment laws has been written into statute for a particular retirement system or plan.

– Perception. Government leaders worry that automatic enrollment in a supplemental savings plan might overburden their employees, especially those who earn modest wages.

– Labor questions. There is debate in the labor community about whether automatic enrollment should be supported.

– Administrative challenges, such as multiple record keepers.

Cobb Country, Georgia, offers an example of how auto enrollment can increase participation:

The county started automatic enrollment for new employees in January 2013, and the feature has been very successful at increasing participation in the 457(b) plan. Prior to automatic enrollment, countywide participation in the 457(b) plan was only at about 33%; yet in just a little over a year, it has increased to 57.5%. This increase is striking considering that approximately two-thirds of the employees still participate in the original DB plan. The initial employee contribution under automatic enrollment is 1% of salary, and the county has kept its matching formula for all hybrid plan participants.

Read the full report, containing further analysis and other examples, in the latest issue of Pension Benefits or here.

 

Photo by TaxCredits.net

When Given A Choice, Why Do People Choose DC Plans Over DB Plans?

401k savings jar

In many states, newly hired public employees are faced with a choice: enrollment in a traditional defined-benefit plan, or a 401(k)-style defined-contribution plan.

What drives the decision-making of those who choose DC plans? Scott J. Weisbenner and Jeffrey R. Brown examined the topic in a recent paper in the Journal of Public Economics.

They studied employees in the State Universities Retirement System (SURS) of Illinois, a system that gives every employee a one-time, permanent choice between enrolling in a DB or a DC plan. Here’s what they found about why people might choose DC plans:

First, we find sensible patterns with regard to economic and demographic factors: the probability of choosing the DC plan decreases with the relative financial generosity of the DB plans versus the DC plans and rises with education and income. However, while the relative generosity of the plans does have a nontrivial effect on pension plan choice, it certainly is not a “sufficient statistic” in explaining that choice nor is it the most important determinant in terms of its economic magnitude.

Second, we find that the ability to control for beliefs, preferences, financial skills, and plan knowledge – variables that are not available in standard administrative data sets – increases the amount of variation in plan choice that we are able to explain by approximately seven-fold, relative to using standard economic and demographic variables alone. Specifically, as measured by adjusted R-squared, economic and demographic characteristics such as gender, marital status, presence of children, education, income, net worth, occupation, and (self-reported) health can explain only 6.2% of the overall variation in the DB versus DC plan choice (adjusted R-squared = 0.062). When we expand our regression to include information about beliefs, preferences, financial skills, and plan knowledge, the adjusted R-squared rises to 0.471. Among the important factors in the DB/DC plan choice are respondent attitudes about risk/return trade-offs, financial literacy, beliefs about plan parameters, and attitudes about the importance of various plan attributes.

Third, we note that beliefs about plan parameters are important even when these beliefs are incorrect. In general, people seem to make sensible choices based on what they believe to be true about the plans, but they do not always have accurate beliefs (and thus may not be making optimal decisions). Finally, we provide evidence that preferences over the attributes of the retirement system (e.g., the degree of control provided) are also significant determinants of the DB/DC plan decision.

The paper is titled “Why do individuals choose defined contribution plans? Evidence from participants in a large public plan” and can be read in full here.

 

Photo by TaxCredits.net

Video: Lessons From Pension Reform in Utah

In the video above, former Utah senator Dan Liljenquist talks about the pension reform efforts he sponsored in Utah from 2008-2011 and what other states can learn from those efforts.

Liljenquist sponsored bills that ended “double-dipping” in the state, moved new hires into a defined-contribution plan and ended pension benefits for Utah lawmakers.